CONFIDEN TIAL DRAFT 4 EXECUTIVE SUMMARY ......................................................... ......... 4 1. BACKGROUND AND OVERVIEW ............................................. 4 1.1. BACKGROUND ................................................................. ........ 4 1.2. OVERVIEW ................................................................. ............. 4 2. TERMS OF REFERENCE OF THE TASK FORCE .................... 4 2.1. INTRODUCTION ................................................................. ....... 4 2.2. MEMBERS OF THE TASK FORCE ................................................ 4
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CONFIDENTIALDRAFT4EXECUTIVE SUMMARY 41 BACKGROUND AND OVERVIEW 411 BACKGROUND 412 OVERVIEW 42 TERMS OF REFERENCE OF THE TASK FORCE 421 INTRODUCTION 422 MEMBERS OF THE TASK FORCE 43 SCOPE AND WORK DONE 431 WORK APPROACH 432 LIMITATIONS AND CONSTRAINTS 433 SUBCOMMITTEES1048584 MEMBERSHIP AND TERMS OF REFERENCE 44 REVENUE REVIEW AND DEBT VERIFICATION 441 INTRODUCTION 442 PRODUCTION 443 DOMESTIC CRUDE SALES 444 EQUITY CRUDE OIL SALES 445 SALE OF THE NATIONAL ENTITLEMENT (GAS) 446 SALE OF REFINED PETROLEUM PRODUCTS 447 NNPC AND ITS SUBSIDIARIES 448 TAXES 449 SIGNATURE BONUS 4410 CONCESSION RENTALS 4411 ROYALTIES (CRUDE OIL AND GAS) 4412 GAS FLARE PENALTIES 4413 MISCELLANEOUS OIL REVENUES 45 REVENUE LOSSES IN THE NIGERIAN PETROLEUM
INDUSTRY 451 OVERVIEW 452 SECURITY ISSUES AND THEFT IN THE NIGERIAN PETROLEUMREVENUE VALUE CHAIN 453 PIONEER STATUS GRANTED TO INDIGENOUS COMPANIES 454 COLLATERAL SOCIAL COSTS OF THEFT 46 DEBT COLLECTION 461 DEBT ANALYSIS 462 DEBT COLLECTION EFFORTS 463 DEBT RECONCILIATION 47 CROSS DEBT MATRIX 471 DEBT MATRIX SCHEMATIC 472 DEBTS PROFILE 48 AUTOMATION AND TECHNOLOGY INTEGRATION 481 INTRODUCTION 482 SUMMARY OF WORK DONE 4
CONFIDENTIALDRAFT583 FINDINGS 59 RECOMMENDATIONS 591 INTRODUCTION 592 STRATEGIC MANAGEMENT RECOMMENDATIONS 593 TRANSITION MECHANISMS 594 REVENUE AND DEBT VERIFICATION 595 REDUCING REVENUE LOSSES IN THE NIGERIAN PETROLEUMINDUSTRY 596 AUTOMATION OF THE NIGERIAN PETROLEUM INDUSTRY 5
CONFIDENTIALDRAFT6LIST OF ABBREVIATIONS ACRONYMSAF ALTERNATIVE FINANCINGBPD BARRELS PER DAYCA CARRY AGREEMENTCBN CENTRAL BANK OF NIGERIACOMD CRUDE OIL MARKETING DIVISIONCOSM CRUDE OIL STOCK MANAGEMENTDPR DEPARTMENT OF PETROLEUM RESOURCESEFCC ECONOMIC AND FINANCIAL CRIMES COMMISSIONEIA ENERGY INFORMATION ADMINISTRATIONERP ENTERPRISE RESOURCE PLANNING SYSTEMFAAC FEDERAL ACCOUNTS ALLOCATION COMMITTEEFGN FEDERAL GOVERNMENT OF NIGERIAFIRS FEDERAL INLAND REVENUE SERVICEFMF FEDERAL MINISTRY OF FINANCEGTL GAS TO LIQUIDHAGFHMJ HONOURABLE ATTORNEY GENERAL OF THE FEDERATIONHONOURABLE MINISTER OF JUSTICEIOC INTERNATIONAL OIL COMPANYIT INFORMATION TECHNOLOGYJOA JOINT OPERATING AGREEMENTJV JOINT VENTURELNG LIQUEFIED NATURAL GASLOC LOCAL OIL COMPANYLPG LIQUEFIED PETROLEUM GASMCA MODIFIED CARRY AGREEMENTMPR MINISTRY OF PETROLEUM RESOURCESNAPIMS NATIONAL PETROLEUM INVESTMENT MANAGEMENT SERVICESNCS NIGERIA CUSTOMS SERVICE
CONFIDENTIALDRAFT7NDR NATIONAL DATA REPOSITORYNEITI NIGERIAN EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVENGL NATURAL GAS TO LIQUIDSNLNG NIGERIA LIQUEFIED NATURAL GASNNPC NIGERIAN NATIONAL PETROLEUM CORPORATIONNPMS NATIONAL PRODUCTION MONITORING SYSTEMNXP NATIONAL EXPORT PROCESSINGOAGF OFFICE OF THE ACCOUNTANT GENERAL OF THE FEDERATIONOPTS OIL PRODUCERS TRADE SECTIONOSP OFFICIAL SELLING PRICEPIB PETROLEUM INDUSTRY BILLPMO PROJECT MANAGEMENT OFFICEPPMC PIPELINE PRODUCTS AND MARKETING COMPANYPPPRA PETROLEUM PRODUCTS PRICING REGULATORY AGENCYPPT PETROLEUM PROFITS TAXPRSTF PETROLEUM REVENUE SPECIAL TASK FORCEPSC PRODUCTION SHARING CONTRACTTOR TERMS OF REFERENCE
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Executive Summary
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CONFIDENTIALDRAFT11The Petroleum RevenuesSpecial Task Force carried out areview of the Nigerian PetroleumIndustry with a view to fulfillingits Terms of Reference asinaugurated by the HonourableMinister of PetroleumResources
Executive SummaryBackgroundThe Honourable Minister of Petroleum Resources driven bythe need to strengthen the institutions responsible for
Petroleum Revenue Management commissioned thePetroleum Revenue Special Task force (PRSTF) on 28February 2012 The goal of the Task Force was to supportthe programme of the Federal Government of Nigeria inenhancing optimization probity and accountability in theoperations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgentneed to establish the streams of revenue flows from thePetroleum sector to the Federal Republic of Nigeria anddesign systems and processes which would enhance theaccountability of each agency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum ValueChain Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across thevalue chain provide reasonable assurance that revenuesfrom the Petroleum Industry are captured completerecorded intact properly accounted for and that revenue dueis demanded and collectedTerms of ReferenceAt the inauguration of the Petroleum Revenue Special TaskForce the following Terms of Reference (ToR) werecommunicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria
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DRAFT122 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment termsby all oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effectivetracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in theFederal Ministry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring atall times the integrity of payments to the FederalGovernment of Nigeria and6 To submit monthly reports for ministerial review andfurther actionScope and MethodologySince its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written andverbal presentations from the various stakeholder groupswithin the Petroleum Industry This was to enable the TaskForce to understand the challenges faced and the type ofreforms that are required This was all carried out with a viewto determining and optimising the nation1048584s revenue streamsfrom all sectors within the industryThe Task Force members also visited and reviewed selectedagencies and operators supported by the Consultants forthe period spanning 1 January 2005 to 31 December 2011 inline with the Statute of Limitations Two workshops were alsoheld to aid information gathering process with respect to keyissues of Metering and Measurement in the Oil amp Gas SectorValue Chain and Security in the Oil and Gas SectorApart from several plenary meetings to receive briefingsanalyse gathered information and deliberate on findings the
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
INDUSTRY 451 OVERVIEW 452 SECURITY ISSUES AND THEFT IN THE NIGERIAN PETROLEUMREVENUE VALUE CHAIN 453 PIONEER STATUS GRANTED TO INDIGENOUS COMPANIES 454 COLLATERAL SOCIAL COSTS OF THEFT 46 DEBT COLLECTION 461 DEBT ANALYSIS 462 DEBT COLLECTION EFFORTS 463 DEBT RECONCILIATION 47 CROSS DEBT MATRIX 471 DEBT MATRIX SCHEMATIC 472 DEBTS PROFILE 48 AUTOMATION AND TECHNOLOGY INTEGRATION 481 INTRODUCTION 482 SUMMARY OF WORK DONE 4
CONFIDENTIALDRAFT583 FINDINGS 59 RECOMMENDATIONS 591 INTRODUCTION 592 STRATEGIC MANAGEMENT RECOMMENDATIONS 593 TRANSITION MECHANISMS 594 REVENUE AND DEBT VERIFICATION 595 REDUCING REVENUE LOSSES IN THE NIGERIAN PETROLEUMINDUSTRY 596 AUTOMATION OF THE NIGERIAN PETROLEUM INDUSTRY 5
CONFIDENTIALDRAFT6LIST OF ABBREVIATIONS ACRONYMSAF ALTERNATIVE FINANCINGBPD BARRELS PER DAYCA CARRY AGREEMENTCBN CENTRAL BANK OF NIGERIACOMD CRUDE OIL MARKETING DIVISIONCOSM CRUDE OIL STOCK MANAGEMENTDPR DEPARTMENT OF PETROLEUM RESOURCESEFCC ECONOMIC AND FINANCIAL CRIMES COMMISSIONEIA ENERGY INFORMATION ADMINISTRATIONERP ENTERPRISE RESOURCE PLANNING SYSTEMFAAC FEDERAL ACCOUNTS ALLOCATION COMMITTEEFGN FEDERAL GOVERNMENT OF NIGERIAFIRS FEDERAL INLAND REVENUE SERVICEFMF FEDERAL MINISTRY OF FINANCEGTL GAS TO LIQUIDHAGFHMJ HONOURABLE ATTORNEY GENERAL OF THE FEDERATIONHONOURABLE MINISTER OF JUSTICEIOC INTERNATIONAL OIL COMPANYIT INFORMATION TECHNOLOGYJOA JOINT OPERATING AGREEMENTJV JOINT VENTURELNG LIQUEFIED NATURAL GASLOC LOCAL OIL COMPANYLPG LIQUEFIED PETROLEUM GASMCA MODIFIED CARRY AGREEMENTMPR MINISTRY OF PETROLEUM RESOURCESNAPIMS NATIONAL PETROLEUM INVESTMENT MANAGEMENT SERVICESNCS NIGERIA CUSTOMS SERVICE
CONFIDENTIALDRAFT7NDR NATIONAL DATA REPOSITORYNEITI NIGERIAN EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVENGL NATURAL GAS TO LIQUIDSNLNG NIGERIA LIQUEFIED NATURAL GASNNPC NIGERIAN NATIONAL PETROLEUM CORPORATIONNPMS NATIONAL PRODUCTION MONITORING SYSTEMNXP NATIONAL EXPORT PROCESSINGOAGF OFFICE OF THE ACCOUNTANT GENERAL OF THE FEDERATIONOPTS OIL PRODUCERS TRADE SECTIONOSP OFFICIAL SELLING PRICEPIB PETROLEUM INDUSTRY BILLPMO PROJECT MANAGEMENT OFFICEPPMC PIPELINE PRODUCTS AND MARKETING COMPANYPPPRA PETROLEUM PRODUCTS PRICING REGULATORY AGENCYPPT PETROLEUM PROFITS TAXPRSTF PETROLEUM REVENUE SPECIAL TASK FORCEPSC PRODUCTION SHARING CONTRACTTOR TERMS OF REFERENCE
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Executive Summary
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CONFIDENTIALDRAFT11The Petroleum RevenuesSpecial Task Force carried out areview of the Nigerian PetroleumIndustry with a view to fulfillingits Terms of Reference asinaugurated by the HonourableMinister of PetroleumResources
Executive SummaryBackgroundThe Honourable Minister of Petroleum Resources driven bythe need to strengthen the institutions responsible for
Petroleum Revenue Management commissioned thePetroleum Revenue Special Task force (PRSTF) on 28February 2012 The goal of the Task Force was to supportthe programme of the Federal Government of Nigeria inenhancing optimization probity and accountability in theoperations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgentneed to establish the streams of revenue flows from thePetroleum sector to the Federal Republic of Nigeria anddesign systems and processes which would enhance theaccountability of each agency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum ValueChain Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across thevalue chain provide reasonable assurance that revenuesfrom the Petroleum Industry are captured completerecorded intact properly accounted for and that revenue dueis demanded and collectedTerms of ReferenceAt the inauguration of the Petroleum Revenue Special TaskForce the following Terms of Reference (ToR) werecommunicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria
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DRAFT122 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment termsby all oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effectivetracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in theFederal Ministry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring atall times the integrity of payments to the FederalGovernment of Nigeria and6 To submit monthly reports for ministerial review andfurther actionScope and MethodologySince its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written andverbal presentations from the various stakeholder groupswithin the Petroleum Industry This was to enable the TaskForce to understand the challenges faced and the type ofreforms that are required This was all carried out with a viewto determining and optimising the nation1048584s revenue streamsfrom all sectors within the industryThe Task Force members also visited and reviewed selectedagencies and operators supported by the Consultants forthe period spanning 1 January 2005 to 31 December 2011 inline with the Statute of Limitations Two workshops were alsoheld to aid information gathering process with respect to keyissues of Metering and Measurement in the Oil amp Gas SectorValue Chain and Security in the Oil and Gas SectorApart from several plenary meetings to receive briefingsanalyse gathered information and deliberate on findings the
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT6LIST OF ABBREVIATIONS ACRONYMSAF ALTERNATIVE FINANCINGBPD BARRELS PER DAYCA CARRY AGREEMENTCBN CENTRAL BANK OF NIGERIACOMD CRUDE OIL MARKETING DIVISIONCOSM CRUDE OIL STOCK MANAGEMENTDPR DEPARTMENT OF PETROLEUM RESOURCESEFCC ECONOMIC AND FINANCIAL CRIMES COMMISSIONEIA ENERGY INFORMATION ADMINISTRATIONERP ENTERPRISE RESOURCE PLANNING SYSTEMFAAC FEDERAL ACCOUNTS ALLOCATION COMMITTEEFGN FEDERAL GOVERNMENT OF NIGERIAFIRS FEDERAL INLAND REVENUE SERVICEFMF FEDERAL MINISTRY OF FINANCEGTL GAS TO LIQUIDHAGFHMJ HONOURABLE ATTORNEY GENERAL OF THE FEDERATIONHONOURABLE MINISTER OF JUSTICEIOC INTERNATIONAL OIL COMPANYIT INFORMATION TECHNOLOGYJOA JOINT OPERATING AGREEMENTJV JOINT VENTURELNG LIQUEFIED NATURAL GASLOC LOCAL OIL COMPANYLPG LIQUEFIED PETROLEUM GASMCA MODIFIED CARRY AGREEMENTMPR MINISTRY OF PETROLEUM RESOURCESNAPIMS NATIONAL PETROLEUM INVESTMENT MANAGEMENT SERVICESNCS NIGERIA CUSTOMS SERVICE
CONFIDENTIALDRAFT7NDR NATIONAL DATA REPOSITORYNEITI NIGERIAN EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVENGL NATURAL GAS TO LIQUIDSNLNG NIGERIA LIQUEFIED NATURAL GASNNPC NIGERIAN NATIONAL PETROLEUM CORPORATIONNPMS NATIONAL PRODUCTION MONITORING SYSTEMNXP NATIONAL EXPORT PROCESSINGOAGF OFFICE OF THE ACCOUNTANT GENERAL OF THE FEDERATIONOPTS OIL PRODUCERS TRADE SECTIONOSP OFFICIAL SELLING PRICEPIB PETROLEUM INDUSTRY BILLPMO PROJECT MANAGEMENT OFFICEPPMC PIPELINE PRODUCTS AND MARKETING COMPANYPPPRA PETROLEUM PRODUCTS PRICING REGULATORY AGENCYPPT PETROLEUM PROFITS TAXPRSTF PETROLEUM REVENUE SPECIAL TASK FORCEPSC PRODUCTION SHARING CONTRACTTOR TERMS OF REFERENCE
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Executive Summary
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CONFIDENTIALDRAFT11The Petroleum RevenuesSpecial Task Force carried out areview of the Nigerian PetroleumIndustry with a view to fulfillingits Terms of Reference asinaugurated by the HonourableMinister of PetroleumResources
Executive SummaryBackgroundThe Honourable Minister of Petroleum Resources driven bythe need to strengthen the institutions responsible for
Petroleum Revenue Management commissioned thePetroleum Revenue Special Task force (PRSTF) on 28February 2012 The goal of the Task Force was to supportthe programme of the Federal Government of Nigeria inenhancing optimization probity and accountability in theoperations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgentneed to establish the streams of revenue flows from thePetroleum sector to the Federal Republic of Nigeria anddesign systems and processes which would enhance theaccountability of each agency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum ValueChain Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across thevalue chain provide reasonable assurance that revenuesfrom the Petroleum Industry are captured completerecorded intact properly accounted for and that revenue dueis demanded and collectedTerms of ReferenceAt the inauguration of the Petroleum Revenue Special TaskForce the following Terms of Reference (ToR) werecommunicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria
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DRAFT122 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment termsby all oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effectivetracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in theFederal Ministry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring atall times the integrity of payments to the FederalGovernment of Nigeria and6 To submit monthly reports for ministerial review andfurther actionScope and MethodologySince its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written andverbal presentations from the various stakeholder groupswithin the Petroleum Industry This was to enable the TaskForce to understand the challenges faced and the type ofreforms that are required This was all carried out with a viewto determining and optimising the nation1048584s revenue streamsfrom all sectors within the industryThe Task Force members also visited and reviewed selectedagencies and operators supported by the Consultants forthe period spanning 1 January 2005 to 31 December 2011 inline with the Statute of Limitations Two workshops were alsoheld to aid information gathering process with respect to keyissues of Metering and Measurement in the Oil amp Gas SectorValue Chain and Security in the Oil and Gas SectorApart from several plenary meetings to receive briefingsanalyse gathered information and deliberate on findings the
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT7NDR NATIONAL DATA REPOSITORYNEITI NIGERIAN EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVENGL NATURAL GAS TO LIQUIDSNLNG NIGERIA LIQUEFIED NATURAL GASNNPC NIGERIAN NATIONAL PETROLEUM CORPORATIONNPMS NATIONAL PRODUCTION MONITORING SYSTEMNXP NATIONAL EXPORT PROCESSINGOAGF OFFICE OF THE ACCOUNTANT GENERAL OF THE FEDERATIONOPTS OIL PRODUCERS TRADE SECTIONOSP OFFICIAL SELLING PRICEPIB PETROLEUM INDUSTRY BILLPMO PROJECT MANAGEMENT OFFICEPPMC PIPELINE PRODUCTS AND MARKETING COMPANYPPPRA PETROLEUM PRODUCTS PRICING REGULATORY AGENCYPPT PETROLEUM PROFITS TAXPRSTF PETROLEUM REVENUE SPECIAL TASK FORCEPSC PRODUCTION SHARING CONTRACTTOR TERMS OF REFERENCE
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Executive Summary
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CONFIDENTIALDRAFT11The Petroleum RevenuesSpecial Task Force carried out areview of the Nigerian PetroleumIndustry with a view to fulfillingits Terms of Reference asinaugurated by the HonourableMinister of PetroleumResources
Executive SummaryBackgroundThe Honourable Minister of Petroleum Resources driven bythe need to strengthen the institutions responsible for
Petroleum Revenue Management commissioned thePetroleum Revenue Special Task force (PRSTF) on 28February 2012 The goal of the Task Force was to supportthe programme of the Federal Government of Nigeria inenhancing optimization probity and accountability in theoperations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgentneed to establish the streams of revenue flows from thePetroleum sector to the Federal Republic of Nigeria anddesign systems and processes which would enhance theaccountability of each agency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum ValueChain Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across thevalue chain provide reasonable assurance that revenuesfrom the Petroleum Industry are captured completerecorded intact properly accounted for and that revenue dueis demanded and collectedTerms of ReferenceAt the inauguration of the Petroleum Revenue Special TaskForce the following Terms of Reference (ToR) werecommunicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria
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DRAFT122 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment termsby all oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effectivetracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in theFederal Ministry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring atall times the integrity of payments to the FederalGovernment of Nigeria and6 To submit monthly reports for ministerial review andfurther actionScope and MethodologySince its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written andverbal presentations from the various stakeholder groupswithin the Petroleum Industry This was to enable the TaskForce to understand the challenges faced and the type ofreforms that are required This was all carried out with a viewto determining and optimising the nation1048584s revenue streamsfrom all sectors within the industryThe Task Force members also visited and reviewed selectedagencies and operators supported by the Consultants forthe period spanning 1 January 2005 to 31 December 2011 inline with the Statute of Limitations Two workshops were alsoheld to aid information gathering process with respect to keyissues of Metering and Measurement in the Oil amp Gas SectorValue Chain and Security in the Oil and Gas SectorApart from several plenary meetings to receive briefingsanalyse gathered information and deliberate on findings the
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
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Executive Summary
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CONFIDENTIALDRAFT11The Petroleum RevenuesSpecial Task Force carried out areview of the Nigerian PetroleumIndustry with a view to fulfillingits Terms of Reference asinaugurated by the HonourableMinister of PetroleumResources
Executive SummaryBackgroundThe Honourable Minister of Petroleum Resources driven bythe need to strengthen the institutions responsible for
Petroleum Revenue Management commissioned thePetroleum Revenue Special Task force (PRSTF) on 28February 2012 The goal of the Task Force was to supportthe programme of the Federal Government of Nigeria inenhancing optimization probity and accountability in theoperations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgentneed to establish the streams of revenue flows from thePetroleum sector to the Federal Republic of Nigeria anddesign systems and processes which would enhance theaccountability of each agency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum ValueChain Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across thevalue chain provide reasonable assurance that revenuesfrom the Petroleum Industry are captured completerecorded intact properly accounted for and that revenue dueis demanded and collectedTerms of ReferenceAt the inauguration of the Petroleum Revenue Special TaskForce the following Terms of Reference (ToR) werecommunicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria
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DRAFT122 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment termsby all oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effectivetracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in theFederal Ministry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring atall times the integrity of payments to the FederalGovernment of Nigeria and6 To submit monthly reports for ministerial review andfurther actionScope and MethodologySince its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written andverbal presentations from the various stakeholder groupswithin the Petroleum Industry This was to enable the TaskForce to understand the challenges faced and the type ofreforms that are required This was all carried out with a viewto determining and optimising the nation1048584s revenue streamsfrom all sectors within the industryThe Task Force members also visited and reviewed selectedagencies and operators supported by the Consultants forthe period spanning 1 January 2005 to 31 December 2011 inline with the Statute of Limitations Two workshops were alsoheld to aid information gathering process with respect to keyissues of Metering and Measurement in the Oil amp Gas SectorValue Chain and Security in the Oil and Gas SectorApart from several plenary meetings to receive briefingsanalyse gathered information and deliberate on findings the
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
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CONFIDENTIALDRAFT11The Petroleum RevenuesSpecial Task Force carried out areview of the Nigerian PetroleumIndustry with a view to fulfillingits Terms of Reference asinaugurated by the HonourableMinister of PetroleumResources
Executive SummaryBackgroundThe Honourable Minister of Petroleum Resources driven bythe need to strengthen the institutions responsible for
Petroleum Revenue Management commissioned thePetroleum Revenue Special Task force (PRSTF) on 28February 2012 The goal of the Task Force was to supportthe programme of the Federal Government of Nigeria inenhancing optimization probity and accountability in theoperations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgentneed to establish the streams of revenue flows from thePetroleum sector to the Federal Republic of Nigeria anddesign systems and processes which would enhance theaccountability of each agency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum ValueChain Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across thevalue chain provide reasonable assurance that revenuesfrom the Petroleum Industry are captured completerecorded intact properly accounted for and that revenue dueis demanded and collectedTerms of ReferenceAt the inauguration of the Petroleum Revenue Special TaskForce the following Terms of Reference (ToR) werecommunicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria
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DRAFT122 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment termsby all oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effectivetracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in theFederal Ministry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring atall times the integrity of payments to the FederalGovernment of Nigeria and6 To submit monthly reports for ministerial review andfurther actionScope and MethodologySince its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written andverbal presentations from the various stakeholder groupswithin the Petroleum Industry This was to enable the TaskForce to understand the challenges faced and the type ofreforms that are required This was all carried out with a viewto determining and optimising the nation1048584s revenue streamsfrom all sectors within the industryThe Task Force members also visited and reviewed selectedagencies and operators supported by the Consultants forthe period spanning 1 January 2005 to 31 December 2011 inline with the Statute of Limitations Two workshops were alsoheld to aid information gathering process with respect to keyissues of Metering and Measurement in the Oil amp Gas SectorValue Chain and Security in the Oil and Gas SectorApart from several plenary meetings to receive briefingsanalyse gathered information and deliberate on findings the
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
Petroleum Revenue Management commissioned thePetroleum Revenue Special Task force (PRSTF) on 28February 2012 The goal of the Task Force was to supportthe programme of the Federal Government of Nigeria inenhancing optimization probity and accountability in theoperations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgentneed to establish the streams of revenue flows from thePetroleum sector to the Federal Republic of Nigeria anddesign systems and processes which would enhance theaccountability of each agency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum ValueChain Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across thevalue chain provide reasonable assurance that revenuesfrom the Petroleum Industry are captured completerecorded intact properly accounted for and that revenue dueis demanded and collectedTerms of ReferenceAt the inauguration of the Petroleum Revenue Special TaskForce the following Terms of Reference (ToR) werecommunicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria
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DRAFT122 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment termsby all oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effectivetracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in theFederal Ministry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring atall times the integrity of payments to the FederalGovernment of Nigeria and6 To submit monthly reports for ministerial review andfurther actionScope and MethodologySince its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written andverbal presentations from the various stakeholder groupswithin the Petroleum Industry This was to enable the TaskForce to understand the challenges faced and the type ofreforms that are required This was all carried out with a viewto determining and optimising the nation1048584s revenue streamsfrom all sectors within the industryThe Task Force members also visited and reviewed selectedagencies and operators supported by the Consultants forthe period spanning 1 January 2005 to 31 December 2011 inline with the Statute of Limitations Two workshops were alsoheld to aid information gathering process with respect to keyissues of Metering and Measurement in the Oil amp Gas SectorValue Chain and Security in the Oil and Gas SectorApart from several plenary meetings to receive briefingsanalyse gathered information and deliberate on findings the
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT122 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment termsby all oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effectivetracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in theFederal Ministry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring atall times the integrity of payments to the FederalGovernment of Nigeria and6 To submit monthly reports for ministerial review andfurther actionScope and MethodologySince its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written andverbal presentations from the various stakeholder groupswithin the Petroleum Industry This was to enable the TaskForce to understand the challenges faced and the type ofreforms that are required This was all carried out with a viewto determining and optimising the nation1048584s revenue streamsfrom all sectors within the industryThe Task Force members also visited and reviewed selectedagencies and operators supported by the Consultants forthe period spanning 1 January 2005 to 31 December 2011 inline with the Statute of Limitations Two workshops were alsoheld to aid information gathering process with respect to keyissues of Metering and Measurement in the Oil amp Gas SectorValue Chain and Security in the Oil and Gas SectorApart from several plenary meetings to receive briefingsanalyse gathered information and deliberate on findings the
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
Task Force also operated through constituted two (2) ad-hocsubcommittees to conduct a detailed review of NNPC1048584s andDPR1048584s roles in petroleum revenue management Five (5)
CONFIDENTIALDRAFT13standing subcommittees were also formed and conducteddetailed assessments followed with recommendations inspecific areas relevant to the overall ToR Specifically inpursuance of ToR 2 the Task Force through the Security andEnforcement Subcommittee also liaised with relevantagencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessaryRevenue Review and Debt Verification FindingsThe Task Force in pursuance of ToR 1 and 2 conductedactivities to determine and verify all Petroleum Upstream andDownstream Revenues due and payable to Nigeria and tookall necessary steps to collect all debts due and owingIt was determined that the main petroleum revenues due tothe national treasury in respect of oil and gas activities inNigeria areDomestic Crude Oil Sales Equity Crude Oil Sales GasSales Refined Petroleum Products sales Profits from NNPCsubsidiaries Petroleum Profits Tax Company Income TaxSignature Bonus Concession Rentals Royalties from Oil andGas Gas Flare Penalties and Miscellaneous Oil Revenues
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
The Task Force1048584s key findings are presented below accordingto these revenue streams1 Proceeds from the sale of Domestic Crude OilAs at 31 December 2011 N843 million1 was due to theFederation in respect of Domestic Crude Oil allocations Theamounts outstanding as at 31 December 2011 representamounts due for the months of September 2011 to December2011 In view of the 90-day credit period the outstandingamount as at 31 December 2011 was not due for paymentThe Task Force received representations from the NNPC andother relevant agencies on the Corporation1048584s practice ofdeducting amounts for subsidy-related expenses prior toremittance of these revenues In the course of the TaskForce1048584s work we did not receive sufficient justification for thepractice which does not accord with the law with particularreference to the Constitution1 PRSTF is aware that further settlement should now have reflected providing figures asat April 2012
CONFIDENTIALDRAFT14Our review of the records received for 2002 to 2011 showedan inconsistent pattern in the implementation of the policy toallocate 445000bpd allocation to NNPC with variancesfound for the ten years reviewedThe Task Force also compared the average price per barrelpayable by NNPC for Domestic Crude with the average
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
weekly prices for Nigeria Bonny Light Forcados obtainedfrom the Energy Information Administration (EIA) The reviewrevealed that over a 10 year period (2002 1048584 2011) the Statemay have been short paid by an estimated sum of US$ 5billion although it was understood from discussions withNNPC officials that the pricing of domestic crude oil wasbased on international prices Enquiries from NNPC revealedthat up until October 2003 NNPC was granted fixed priceregimes which explain the wide disparity in prices in theearlier yearsThe Task Force found that the exchange rates used inarriving at the Naira equivalent of the amounts payablediffered from the CBN rates for six (6) of the ten (10) yearsreviewed The potential underpayment of amounts payable tothe Federation Account over the 10- year period is estimatedat N866 billion Also the Task Force1048584s review of thedomestic crude utilisation showed that the percentage notrefined in- country ranged from between 50 to 88 overthe 10 year period2 Proceeds from Equity Crude Oil SalesEquity Crude represents government1048584s share of crude oilproduction (excluding domestic crude) obtained mainly fromthree (3) arrangements Joint Operating Agreements (JOA)with IOCs Production Sharing Contracts (PSC) and ServiceContracts Equity Crude Oil proceeds are remitted into theFederation account as export proceeds DPR accounts asRoyalties and FIRS accounts as Petroleum Profit TaxThe Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations compounded by the currentstructure of NNPC such as multiple roles executed throughNAPIMS and its COMDA decline was also observed in national investments thatwould increase the nation1048584s proven reserves Accordinglydespite the increase in crude oil production in Nigeria over
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TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
TIALDRAFT15the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestmentsThe Task Force found that legislation governing the industryand agreements with third parties are outdated do not reflectcurrent economic or legal realities or include ambiguousclauses Also there are some provisions within the legislationthat could significantly improve government1048584s revenue thatthe government is yet to take advantage of Examplesinclude a provision to ensure that the share of theGovernment of the Federation in the additional revenue shallbe adjusted under the Production Sharing Contracts if theprice of crude oil at any time exceeds $20 per barrel and therequirement for a periodic review of provisions in specifiedtime framesIt was also observed that some traders lifted crude oilalthough they were not listed on the approved master list ofcustomers who had a valid contract and were selectedthrough an annual bidding process The Task Force researchalso found that quite a number of traders did not demonstraterenowned expertise in the business of crude oil tradingFurthermore the Task Force found that the use of crude oiltraders was contrary to the global trend wherein national oilcompanies develop their own trading arms such as thevarious NNPC trading subsidiaries which currently havelimited capacity The Task Force identified various concernsin this area with Nigeria being the world1048584s only major oilproducer that sells 100 percent of its crude to privatecommodities traders rather than directly to refineriesVarious submissions to the Task Force demonstrated the
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
potential for lost margins to middlemen manipulation ofpricing suboptimal returns and market fraud as emanatingfrom this policy and practiceA review of NAPIMS1048584s audited financial statements as at 31December 2009 showed that Joint Venture cash callspayable was N459568billion Since 2006 government hasnot allocated enough funds to cover these amounts andNNPC has entered into a range of borrowing arrangementsreferred to as Alternative Financing Arrangements with thecosts of financing this debt (estimated at around 8)continuously mounting This cycle will continue to increase inthe coming years unless a systemic solution is found
CONFIDENTIALDRAFT16As JV partners there is a need for the effective managementand oversight of oil companies1048584 operating costs which affectsrevenues accruable to Nigeria There is also a clear trainingtechnology and human capacity gap between NAPIMS staffand their counterparts in the private oil and gas sector3 Proceeds from the Sale of the National Entitlement(Gas)The Task Force aided by the Consultants identified a total ofN137572 billion ($946878 million) due to the Federationfrom SNEPCO representing the proceeds of gas sales fromthe Bonga oil field according to the NNPC (NAPIMS)Financial Statements for the year ended 31 December 2009
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
For Liquefied Natural Gas the price observed at which thefeedstock gas is sold to NLNG seems too generouscompared to prices obtainable on the international marketThe estimated cumulative of the deficit between valueobtainable on the international market and what is currentlybeing obtained from NLNG over the 10 year period amountsto approximately US$29 billion4 Proceeds from Sale of Petroleum ProductsFrom the Task Force1048584s review NNPC is owed N27billionincluding current debt total overdue disputed debt and totaldebt outstanding by the major marketers of petroleumproducts We also found that amounts payable to suppliers ofpetroleum products as at 31 December 2011 amounts toapproximately US$36 billion of which US$27 billionrepresents amounts outstanding for over 365 days The TaskForce also observed that pipeline product loss has steadilyincreased over the years5 NNPC and SubsidiariesFrom review of the latest available audited financialstatements (2009) it was noted that NNPC has sixteen (16)subsidiaries The financial performance of the Corporationand its subsidiaries in 2009 shows the Group had a deficit ofapproximately N298billion for the period Various reviewsconducted by the Task Force showed that the NNPC doesnot receive the required capital to grow its assets or meetoperating costs NNPC has therefore increasingly relied onthe FGN for lines of credit and deduction of oil revenue dueto the Federation Account In our review the legal basis forthis practice was unclear
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DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT176 Signature BonusThe Task Force found that discretionary decision-making inthe award of oil blocks can result in revenue losses forNigeria Our review also showed that the management ofpast bid rounds has resulted in lower demand and fewerqualified bidders uncompleted deals weakened governmentreturns and lower development of acreageThe DPR provided the task force with information indicatingthat 67 licenses were awarded between 1 January 2005 and31 December 2011 with an outstanding balance of $566million unpaid in signature bonuses For the 7 discretionaryallocations reviewed the Task Force found $183millionoutstanding and due to the nation1048584s treasury We werehowever informed that of the total $749m outstanding insignature bonuses $321m was legally disputed7 Concession RentalsThe Task Force found that $29million represents outstandingamounts to be collected by the DPR from the variousconcessionaires However we also observed inconsistenciesin records provided by DPR in respect of information andschedules regarding the list of concessions8 Royalties (Crude Oil and Gas)The Task Force found that $3027billion was outstandingfrom the operators for crude oil royalties as at 31 December2011 per the DPR1048584s records Of this amount the DPR hadstipulated that ADDAX is liable to pay $15billion royaltiesunder the 2003 fiscal regime and there is currently a disputebetween Addax and NNPC on the one hand and the DPR onthe other In the course of the review the Task Force alsoencountered differences in records of payments made to theCBN vis-1048584-vis DPR records and lack of independent gasproduction and sales data9 Gas Flare PenaltiesThe Task Force found that the DPR is currently unable toindependently track and measure gas volumes produced andflared and depends largely on the information provided by the
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
operatorsWe also observed that the periodic reconciliation meetingswith the operators to address the gas flare volumes weredelayed with only 6 completed of 36 at the time of our review
CONFIDENTIALDRAFT18The total revenue from gas flaring during the review periodwas $175million with the balance outstanding as unpaid wasapproximately $58million indicating that $115million had beenreceived by the DPR We however reviewed paymentsreceived by the CBN in respect of gas flare penaltiesHowever a review of CBN records showed that $137millionwas received between 1 January 2005 and 31 December2011 The DPR was not able to reconcile the $115 million tothe $137millionLastly operators have not compiled with the recentMinisterial directive signed on 15 August 2011 increasing thegas penalty fee from N1000 to $350 The operators havecontinued to flare gas at the rate of N10 and records at theDPR reveal that none of the companies have paid any gaspenalty fee in 201210 Miscellaneous Oil RevenuesThe Task Force was unable to obtain a comprehensivemiscellaneous oil revenue schedule from the officials of theDPR although a review of CBN1048584s records provided someinformation albeit with unexplained variances The amounts
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
due in respect of the various fees relating to themiscellaneous oil revenues are also not reflective of thecurrent economic realitiesRevenue Losses in the Nigerian Petroleum IndustryThe Task Force identified sources of revenue losses in theindustry with a view to identify opportunity areas for majorreform in boosting resources obtainable from the sector fornational development These include the following1 Crude Oil Theft and Associated Revenue LossesHydrocarbon theft was found by the Task Force as being amajor and chronic source of revenue loss to Nigeria Theft ofcrude oil and refined petroleum products may be reachingemergency levels in NigeriaThe Task Force observed various estimates by InternationalOil Companies and Government officials of the scale andvolume of crude theft which ranged from 6 to 30 percent ofproduction While the Task Force does not endorse any ofthe numbers it received we note that it could actually be ashigh as 250000 barrels per day closer to 10 of daily
CONFIDENTIALDRAFT19productions amounting to as high as N1 trillion annually Thisissue therefore requires immediate attention2 Lost Refined Products and Associated RevenueLossesThe Task Force did not receive comprehensive figures
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
documenting volumes of refined products stolen or spilledNNPC reports that thieves stole 32 million metric tons ofproducts from its pipeline network between 2001 and 2010and that about 40 percent of products currently channelledthrough pipelines are lost to theft and sabotagePPMC also recorded 4468 product pipeline breaks in 201198 percent of them from sabotage and values the productsstolen from its pipeline network between 2001 and 2010 atN178 billion3 NNPC Withholdings for Costs Associated With Theftand SabotageNNPC withholds oil revenues from the Federation Account tocover costs associated with theft and pipeline sabotage4 Pioneer Status granted to Indigenous CompaniesThe Task Force was informed that at least five companiesAllied Energy Midwestern Oil amp Gas Brittania Oil NigeriaLimited Suntrust Oil Company Nigeria Limited and NigerDelta Petroleum Resources Limited2 have been grantedpioneer status by the Nigerian Investment PromotionCommission (with others pending or undetected) for theirexploration and production activitiesThe Task Force finds that the granting of pioneer status to oiloperators for an activity that is well established for over 40years inappropriate The loss of revenue from the grant ofpioneer status to oil operators is an avoidable loss and it isrecommended that any such further consideration be stoppedforthwith and the current ones set aside and or revoked1Collateral Social Costs of TheftThe Task Force also found that certain social costsemanated from crude oil theft and considered them importantand requiring urgent attention These include environmental2 The argument that the status is appropriate for 1048584exploration1048584 and not 1048584production1048584 isuntenable and self-defeating because once it is accepted that 1048584production1048584 is 1048584alreadybeing carried on1048584 in Nigeria the same goes for 1048584exploration1048584
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TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
TIALDRAFT20pollution and its socioeconomic impacts armed piracy andlost investment in the sector leading to revenue lossesDebt CollectionBased on the detailed review of outstanding debts owed tothe Federation the Task Force determined outstandingamounts for royalties signature bonuses and concessionrentals Pursuant to an initial understanding of ToR 2 of thePRSTF relevant government agencies were invited to assistin a debt collection drive and invitation and demand letterswere sent to over 47 oil companies allegedly indebted to thenation We have recommended that government pursuedebts further in any manner deemed appropriateHowever during the debt reconciliation exercise the sum ofUSD$5830261 was paid into the treasury of Governmentwith evidence of payment while several companies madeundertakings to pay at later datesAutomation of the Nigerian Petroleum IndustryThe Task Force identified Information Technology andbusiness automation gaps by carrying out Current PositionAssessments of the stakeholders within the Oil and Gasproduction value chain including government regulatoryparastatals The assessment scope covered three broadcategories namely Core Business Systems ReportingCapabilities and Automation Capabilities of these entitiesOur findings showed that there were evident automation gapsin the oil and gas value chain specifically in key agenciesunder the Ministry of Petroleum Resources Department ofPetroleum Resources that are vested with the mandate toproduce Oil and Gas licence keep and update recordssupervise petroleum industry operations and ensure payment
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
of rent and royaltiesAdditionally the PRSTF reviewed the state of metering andmeasurement in Nigeria1048584s oil and gas value chain vis-1048584-visbest practices The challenges identified with the currentmetering and measurement regime can be summarised as alack of adequate vision and ownership required to articulateand drive a cohesive implementation of IT and Automation inMPR and DPR
CONFIDENTIALDRAFT21The Task Force identified the following specific challengeswith the metering and measurement regimebull Dependence on manual data gathering processesbull Low level infrastructure at remote locationsbull Lack of regular and systemic well testingbull Inadequate data and IT infrastructure among industryplayersbull Inadequate MIS reporting and dashboard capabilities inexisting systemsbull Disparate systems with differing data nomenclatureamong operatorsbull Diverse data requirements from Government agenciesbull Multiple and strong stakeholders with divergent interestsThe Task Force also found inconsistent oil and gas dataacross the petroleum industry These inconsistencies ininformation were sighted across the major agencies and
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
parastatals of the MPR as well as with the oil and gasoperators themselves
CONFIDENTIALDRAFT22RecommendationsIn order to address the findings and issues above the TaskForce has developed the following recommendations whichGovernment should implement to address the issuesidentified and their root causes1 Strategic Management RecommendationsFrom a strategic viewpoint of the Task Force1048584s review and thefindings discussed above the Task Force recommends thefollowingbull Set up a process independent of NNPC to review theuse of oil traders and NNPC1048584s system for sellingcrude on grounds of value for money and probitybull Undertake a strategic review of all NNPC subsidiariesbefore the PIB passes with a view to privatizingrepositioning or scrapping non-performing redundantor irrelevant business unitsbull Require a full public report by NNPC of the amountcost and terms of all cash call debts improve reportingof this information to the National Assembly as part ofthe annual budget and oversight processbull Pass an oil sector transparency law that requires all oilcompanies active in Nigeria to report all payments
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
costs and earnings for each license or transactionand to publish all contracts and licensesbull Create a special properly-trained Oil and Gas SectorFinancial Crimes Unit for law enforcement3bull Appoint a new NEITI Board now long overdueMembers should be sector experts with a commitmentto transparency and civil society should appointindependent representativesbull Establish an embedded and independent 1048584office oftransformation1048584 for the sector with a fixed term and3 The EFCC is one government agency with skill sets to develop this specialised area oflaw enforcment
CONFIDENTIALDRAFT23specific mandate to carry through recommendationsand transformational reforms accepted bygovernmentbull Implement an aggressive debt collection process foroutstanding signature bonus payments revoke blocksfrom non-paying firms sanction those agencies thatfailed to collectbull Conduct an independent process audit of all upstreamcost control rules and mechanisms including the useof cross-country price benchmarkingbull Amend the 1984 Special Tribunal (MiscellaneousOffenses) Act to strengthen the legal framework for oil
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
theft and other sector crimesbull Arrest and prosecute perpetrators and financiers ofillegal bunkering rings2 Productionbull Production data for fiscal purposes should be obtainedat the flow stations where crude oil is stabilised andnot at the terminals as is currently the practice3 Domestic Crude Salesbull No deductions should be made from the amountspayable to the Federation Accountbull Domestic crude oil should be sold at internationalcompetitive pricesbull FGN should block leakages in the conversion tofinished goods process of NNPCbull There should be full compliance by NNPC withprevailing CBN exchange rates for remittance of crudeoil proceedsbull The Federal Government should revisit the DomesticCrude Oil Business Model4 Equity Crude Oil Sales
CONFIDENTIALDRAFT24bull Restructure NNPC for single point accountability forPetroleum Revenuesbull National investment in the oil and gas upstream sectormust be managed from a strategic focal point
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
bull Ensure full compliance of all agencies and companieswith existing legislationbull Regularise Crude Oil Lifting Under Contractbull Ensure open competitive selection process for crudeoil salesbull Review the nominations process for all the JointVenturesbull Ensure and institute proper review of all draftcontractual agreementsbull Adequate funding of the Federation1048584s investmentobligationsbull Create standard terms and conditions and uniformterms of contract agreementsbull Proper and realistic budgets and approvals should beprepared annuallybull Capacity Building should be embarked upon forNAPIMS in terms of optimal number and appropriateskills and training level of staffbull Ensure uniformity of the realisable prices used by allpartiesbull Carry out adequate review of the purchase or leaseoption for production equipment5 Sale of the National Entitlement (Gas)bull Draw up master agreements for the development of allpotential gas reserves in Nigeriabull FGN should ensure that written consents exist for gasfor all assetsbull FGN should intensify efforts to get the other LNGprojects up and running
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DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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TIALDRAFT37
Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
CONFIDENTIAL
DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT25bull FGN to carry out a comprehensive review of itsNGLLPG entitlements under the Agip and Shell JointVentures6 Signature Bonusbull The FGN should expedite action with respect to theblocks in dispute in order to ensure that the$321million outstanding is collectedbull DPR should take further actions against theconcessionaires that are yet to pay the amounts due($167million) within the remit of the lawbull Proper record keeping should be enforced at the DPR7 Concession Rentalsbull DPR should take action and enforce collections of theamounts due of $29million within the remit of the lawbull The DPR should put in place measures to ensureconsistency and accuracy of custodial informationrelating to oil and gas concessions8 Royalties (Crude Oil and Gas)bull DPR should take action and enforce collections of theamounts due of $3027billion from relevant operatorswithin the remit of the lawbull DPR should make a demand for the outstandingAddaxNNPC Royalties1048584 payments of approximately$15billion on behalf of the Federal Republic of Nigeriaand the consequences of default should immediatelybe visited on the contract and the relevant partiesbull DPR should instruct the CBN and operators to ensurethe proper description of all revenue remittances inorder to facilitate easy reconciliationbull DPR should independently track and record gasproduction and sales data
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT26bull DPR should ensure that all reconciliation process withall the outstanding gas producing companies isconcluded before the beginning of the next fiscal year9 Gas Flare Penaltiesbull DPR should independently track and record gas flarevolumesbull The reconciliation process should be expedited for alloperators to ensure timely collection of the gas flarepenalty amounts duebull DPR should take action and enforce collections ofamounts due as gas flare penalties within the remit ofthe lawbull Enforce the new gas flare penalty directive as adisincentive to gas flaringbull The FGN should put more effort in enforcing a zerogas flare policy by the beginning of the next fiscalyear10 Miscellaneous Oil Revenuesbull The DPR should employ the use of proper IT systemsand databases to keep its records and ensureconsistency and integrity of information across theorganisationbull The Fee and Licensing regimes for operating in the Oiland gas sector should be reviewed to reflect the
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
current economic realities in the Oil and Gas industry11 Removing the Source and Outlets of Revenue Lossesbull Explore Fingerprinting of Nigeria Oil to enabletrackingbull Establishment of a transparent whistle blowing andinformation portal as an independent and transparentrepository of information on petroleum revenue lossessabotage and illegal activity
CONFIDENTIALDRAFT27bull Implement a deliberate policy on market ban ofparticipants in crude oil theftbull The Fiscal Responsibility Act 2007 should beamended to criminalize withholding payment ofpetroleum revenue after due date and assessmentand a notice of demand12 Automation of the Nigerian Petroleum Industry1 Department of Petroleum Resourcesbull The DPR should work with Galaxy Backbone andcompetent consultants to review on-going projectsNDR and NPMS and also develop a strategic ITblueprint for the organizationbull DPR and MPR should commence the implementationof a portal that aggregates and presents in real time allrelevant information about the operations andperformance of the oil and gas industry
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
bull An ERP Solution should be put in place to capture andautomate the identified backend processes in DPRbull DPR based on its mandate should build a DataWarehouse which would serve as a hub for gatheringvital data about the industry and disseminating reportsin various formats to government stakeholders Aframework and implementation roadmap to fullautomation of measurement and metering should bedeveloped in a collective effort involving DPR and theoperators with oversight from MPR2 Nigerian National Petroleum Corporationbull The implementation of SAP should be expedited tofully automate key processes especially relating torevenue generation processes feeding and pullingdata to external partiesbull The NNPCs culture end user work ethics andemployee resistance to change all need to bemanaged extensively for the SAP implementation tobe a full successbull The SAP implementation should be independentlymonitored from the Ministry to track and ensure thatthe strategic objectives are met
CONFIDENTIALDRAFT283 Central Bank of Nigeriabull A quick win solution would be to study and automate
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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TIALDRAFT37
Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
the NXP forms with a view to track shipments andtrack repatriation of export proceedsbull The existing CBN systems should be interfaced withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Nigeria Customs Services (NCS)bull The existing NCS system should be integrated withother systems in the various relevant agencies inorder to provide an overview of all revenue reportingand enable timely reconciliation betweenorganizations1 Full automation of the Petroleum IndustryThe PRSTF has recommended a way forward for the fullautomation of the Petroleum Industry Key features of theproposed metering and measurement regime in particular areshown belowFigure A Features of Proposed Metering and Measurement Regime
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Background
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
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CONFIDENTIALDRAFT31The Petroleum Revenue SpecialTask Force was set up by theHonourable Minister ofPetroleum with a view toenhancing probity andaccountability in the PetroleumIndustry
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
1 Background andOverview1 BackgroundThe Honourable Minister of Petroleum Resources driven by theneed to strengthen the institutions responsible for PetroleumRevenue Management commissioned the Petroleum RevenueSpecial Task force (PRSTF) on 28 February 2012 The goal ofthe Task Force was to support the programme of the FederalGovernment of Nigeria in enhancing optimization probity andaccountability in the operations of the Petroleum IndustryAs part of this agenda and the issues arising from the variousfiscal regimes existing in the sector there arose an urgent needto establish the streams of revenue flows from the Petroleumsector to the Federal Republic of Nigeria and design systems andprocesses which would enhance the accountability of eachagency or entityThe assignment of the Special Task Force is contained in itsTerms of Reference and covers the entire Petroleum Value Chain(see Figure 1) Accordingly the Task Force set out to confirm ifexisting systems laws processes and functions across the valuechain provide reasonable assurance that revenues from thePetroleum Industry are captured complete recorded intactproperly accounted for and that revenue due is demanded andcollected
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DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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TIALDRAFT37
Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT32Figure 1 Schematic of the Petroleum Value Chain 1048584 (Source KPMG)In recent times various studies and public commentary arereplete with the alleged low optimisation of the nations strategicassets in Oil and Gas reserves and questionable practices withinthe Petroleum Industry This has led to a degree of dispute withregards to Nigeria1048584s production information local consumptionfigures and remittances to the national treasury and how theproceeds are utilisedTechnical and commercial conditions in the sector also argue formaximizing returns from oil and gas For example the TaskForce received submissions indicating that in the next three yearsgovernment1048584s contractual share of profits in most PSCs is due torise around five percent While it is hoped that passing thePetroleum Industry Bill (PIB) will unlock investment the overalltrend (without intervention) in oil revenue receipts is towarddecline for three main reasonsFirst future demand for Nigerian hydrocarbons looks increasinglymixed Supply disruptions due to trouble onshore1048584oil theft inparticular1048584is increasingly limiting attractiveness and investmentsObservers contend that Nigeria has may have dropped anopportunity to be a top LNG exporter given more proactiveinvestments by Asian producers and the rise of shale gas inAmerica Overall foreign direct investment in Nigeria1048584s oil sectorreduced considerably in the last five years
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DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT33Second low investment and an uncertain operating environmentcould stagnate the sector Exploration in Nigeria has reducedthree exploratory wells were drilled in 2011 down from more than20 in 2005 NNPC reports that output from aging onshore wells isfalling 10 to 12 percent a year Production offshore has beenbridging the gap but may soon plateau from lack of new projectsand disappointing exploration resultsIndustry analysts forecast production could drop 20 percent by2020 without additional investment Current average dailyproduction is barely at 2005 levels Reserves and productiongrew marginally over the past decade with Nigeria falling wellbehind its Sub Saharan African neighbours as shown in Table 1belowTable 1 Growth in reserves and production 2000-2010Country Reserves Production2000 2010 growth 2000 2010 growthAngola 6000 13500 125 746 1851 248Chad 900 1500 66 0 122Congo-B 1700 1900 11 254 292 15EG 800 1700 112 91 274 301Sudan 600 6700 1000+ 180 475 264Nigeria 29000 37200 28 2155 2402 10Third the Nation1048584s per barrel profits from oil are also shrinkingAs reservoirs age there is need to drill more wells and usecostlier technology to keep fields producing NNPC estimatesthat by 2014 US$37 billion in new drilling costs would be neededannually to simply retain current production levels Growing use ofalternative finance mechanisms reduces government1048584s takeonshore Nigeria also earns less per barrel offshore than it doeson land such that its increased reliance on offshore fields createsa revenue gapThe current period is thus a pivotal one in the life of the nation1048584sPetroleum Sector Without reforms in oil revenue management
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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TIALDRAFT37
Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT34Nigeria will struggle to keep its status as Africa1048584s leading oilproducer and its goal of becoming one of the world1048584s top 20economies However proactive commitment to reforms nowcould catalyse sector growth and yield ample funds for nationaldevelopmentThis Report of the Petroleum Revenue Special Task Force istherefore structured to present its key findings andrecommendations on the review of the Nigerian Petroleum Sectorin terms of major challenges in revenue generation andoutstanding debt revenue loss areas a cross debt matrix andautomation in the production value chain Our recommendationshave been made to address lapses and leakages and remedialmechanisms that need to be implementedWithin the limited time given to the Special Task Force it has hadto prioritise its work to ascertain the items with the highestrevenue impact or significance and bring out the more compellingrecommendations to support decisions that will propel the desiredtransformation of the Petroleum Sector2 Overview1 The Nigerian Petroleum IndustryNigeria is the home to substantial deposits of oil and gasresources The country1048584s proven oil reserves totalled 372billionbbls as of January 2010 according to the US Energy Information
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
Administration Nigerian Government sources claim that reservesmay actually be as high as 382billion bbls However due to lackof transparency in reporting key statistics on Nigeria1048584shydrocarbons industry vary widely and are often coloured bydifferent interests Still Nigeria1048584s deposits are regardedinternationally as the tenth 1048584 largest in the world and the secondlargest in Africa after LibyaNigeria1048584s oil is prized for its purity Export blends are Bonny Lightand sweet crudes which require less refining and are thus morelucrative The oil typically fetches more on global markets thanBrent Crude the global benchmark oil that is extracted from theNorth SeaDespite the fact that the country1048584s reserves are substantial crudeoil production faces serious challenges such as Nigeria1048584s inabilityto meet its funding obligations to the joint ventures (JVs) Nigeriaalso faces the challenges which include social unrest inproduction areas wilful damage to the pipeline network and crude
CONFIDENTIALDRAFT35oil theft to name a few In 2008 Nigeria1048584s output was enough torank it as Africa1048584s largest producer but since 2009 the country1048584sproduction has been occasionally surpassed by AngolaNigeria also has the ninth 1048584 largest proven gas reservesworldwide at about 52trn cu meters according to governmentfigures Like its oil Nigeria1048584s gas is high quality and low insulphur Of the total 27trn cu meters is associated gas mixed in
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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TIALDRAFT37
Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
with oil deposits Non 1048584 associated gas which is more valuablebecause it does not require separation from crude amounted toabout 25trn cu metersOne of the main issues relating to Nigeria1048584s gas market is gasflaring Before 1999 most gas was flared due to lack of demandIn 2004 both Chevron and Sassol signed gas-to-liquid (GTL)agreements and Mobil decided to reduce flaring to 10 by 2004Since then alternatives to liquefaction and exporting haveemerged in the form of electricity projects petrochemicals plantsand other industrial uses However supply constraints haveblocked growth in gas use due in part to a lack of distributioninfrastructureThese constraints have resulted in significant gas flaring inNigeria The US National Oceanic and AtmosphericAdministration show that Nigeria flared 149billion cu ft (106) in2008 making the country the world1048584s second biggest gas flaringnation after Russia which burned 402 cu ftThe country1048584s downstream sector is also plagued with variouschallenges Nigeria imports most of its refined petroleum productsdue to inadequate refining capacity in-country Officials of thePipelines and Products Marketing Company Limited (PPMC)submitted to the Task Force that Nigeria owns four (4) refinerieswith a combined capacity of 445000bpd In addition for thepurpose of distribution Nigeria has 5120km of pipelines 23storage depots 8 LPG depots 24 pump stations 2 offshorejetties (Atlas Cove and Escravos) and 4 Jetties (Apapa WarriOkrika and Calabar) However the four (4) refineries are in poorshape and currently operate at about 30 capacity due to poormaintenance fire damage crude oil theft and other issuesDomestic consumption of Nigerian crude oil is low 1048584 about200000bpd or around 15 of total petroleum productsconsumedThere are well known and frequently documented challenges tothe downstream sector which include frequent wilful damage tothe pipeline network refined product theft inadequate storage
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TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
TIALDRAFT36tanks high demurrage costs and alleged fraudulent practicesrelating to government subsidiesThe government agency overseeing and representing theinterests of Government in the oil and gas sector is the NigerianNational Petroleum Corporation (NNPC) The NNPC is thenational oil company but performs several other functions aswell serving as energy sector regulator joint venture partner in allonshore operations and the nation1048584s primary source of incomeThe Department of Petroleum Resources a separate body underthe Ministry of Petroleum Resources conducts the bidding roundsfor exploration blocks and tends to be regarded as the technicalregulatorThis introduction gives a glimpse of some of the issues and thecase for change in the Petroleum Sector The next sectiondescribes the terms of reference of the Special Task Force andthe work approach adopted An international firm of consultantsand auditors Pricewaterhouse Coopers (PwC) was engaged tosupport on the forensic reviews and data gathering
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TIALDRAFT37
Terms of Referenceof the Task Force
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CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
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Terms of Referenceof the Task Force
CONFIDENTIALDRAFT38
CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
CONFIDENTIALDRAFT43
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
CONFIDENTIALDRAFT
56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
CONFIDENTIAL
DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT39The Federal Government ofNigeria approved theappointment of Mallam NuhuRibadu as chair of a 20-memberPetroleum Revenue SpecialTaskforce inaugurated by theHonourable Minister ofPetroleum Resources
1 Terms of Reference ofthe Task Force1 IntroductionAt the inauguration of the Petroleum Revenue Special TaskForce by the Honourable Minister on February 28 2012 thefollowing Terms of Reference (ToR) were communicated1 To work with consultants and experts to determine andverify all petroleum upstream and downstream revenues(taxes royalties etc) due and payable to FederalGovernment of Nigeria2 To take all necessary steps to collect all debts due andowing to obtain agreements and enforce payment terms byall oil industry operators3 To design a cross debt matrix between all Agencies andParastatals of the Ministry of Petroleum Resources4 To develop an automated platform to enable effective
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
tracking monitoring and online validation of income anddebt drivers of all Parastatals and Agencies in the FederalMinistry of Petroleum Resources5 To work with world-class consultants to integrate systemsand technology across the production chain to determineand monitor crude oil production and exports ensuring at alltimes the integrity of payments to the Federal Governmentof Nigeria and6 To submit monthly reports for ministerial review and furtheractionThe Task Force over the period of its activities constantlyreviewed the TOR to ensure that it properly understood itsTerms of Reference and to ensure that it activities fell within itsTOR There was some difficulty with interpretation of TORnumber 2 which states that the Task Force was 1048584To take allnecessary steps to collect all debts due and owing to obtainagreements and enforce payment terms by all oil industryoperators1048584 It was initially interpreted to mean literally that the
CONFIDENTIALDRAFT40Task Force was to take all necessary steps to collect due debtsand to enforce payment which necessitated invitation to lawenforcement agencies to assist with such recovery Howeverthe eventual position taken was that appropriaterecommendation would be made to government on necessarysteps to collect due debts and enforcement of payment to
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
enable government decision on that matter prior to collectionand enforcement action2 Members of the Task ForceThe membership of the Petroleum Revenue Special TaskForce is as followsbull Mallam Nuhu Ribadu - Chairmanbull Mr Steve Oronsaye - Deputy Chairmanbull Mallam Abba Kyari - Memberbull Ms Bennedikter Molokwu - - Memberbull Mr Olasupo Shasore SAN - - MemberSecretarybull Mr Anthony Idigbe SAN - - Memberbull Mr Anthony George-Ikoli SAN - Memberbull Dr (Mrs) Omolara Akanji - Memberbull Dr Olisa Agbakoba SAN - - Memberbull Prof Olusegun Okunnu - Memberbull Pastor Ituah Ighodalo - Memberbull Mr BON Otti - Memberbull Mallam Samaila Zubairu - Memberbull Mr Ignatius Adegunle - Memberbull Mr Gerald Ilukwe - Memberbull Rep of FIRS - Ex-Officiobull Rep of FMF Incorporated - Ex-Officiobull Rep of HAGFHMJ - Ex-Officiobull Rep of OAGF - Ex-Officiobull Rep of CBN - Ex-Officiobull Rep of DPR - Ex-Officiobull Rep of NNPC - Ex-Officio
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DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT41Since its inauguration members of the PRSTF haveapproached the assignment with all the seriousness that itdeserves In carrying out its ToR one of the initial activitiesperformed by the PRSTF was to obtain both written and verbalpresentations from the various stakeholder groups within thePetroleum Industry This was to enable the Task Force tounderstand the challenges faced and the type of reforms thatare required This was all carried out with a view to determiningand optimising the nation1048584s revenue streams from all sectorswithin the industryAlso the members of the PRSTF visited various locations asthey deemed necessary
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Scope and Work
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
Done
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3 Scope and Work Done
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
3 Work ApproachThe Petroleum Revenue Special Task Force in order to fulfil itsTerms of Reference carried out the following activitiesbull Set up a Virtual Project Management Office (PMO) managedby BGL Plcbull Confirmed the engagement of Bode Ososami as our Adviserand liaison with other Task Forces set up to consider otheraspects of the oil and gas industrybull Confirmed the engagement of PricewaterhouseCoopersLimited (PwC) as consultants to the Petroleum RevenueSpecial Task Forcebull Selected Industry Stakeholder Groups that were invited toaddress the Special Task Forcebull Prepared and adopted a Work Plan that covered the scope ofthe assignment delineating areas of critical focus scheduledmeetings presentations and interaction with theStakeholders andbull Received briefings and presentations from the followingorganisations- Oil Producers Trade Section (OPTS)- Shell Nigeria- Chevron Nigeria- Trispec Schlumberger- Sahara Group- NNPC Finance and Accounts Directorate Crude OilMarketing Division IT Department and other Divisions- National Petroleum Investment Management Services(NAPIMS)- Pipeline Products and Marketing Company Limited(PPMC)- Department of Petroleum Resources (DPR)- Petroleum Products Pricing Regulatory Agency (PPPRA)- Central Bank of Nigeria (CBN)- Economic and Financial Crimes Commission (EFCC)
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TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
TIALDRAFT45- Inspection Agents (Cobalt International Services NigeriaLimitedThe Petroleum Revenue SpecialTask Force (Special Task Force)in order to fulfil their mandate bythe Honourable Minister ofPetroleum Resources carried outvarious activities in order toacquire relevant information- Services Robinson International and Gulf InspectionServices)- Monitoring Agents (Swede Control Intertek and Q amp Q Pre1048584 Shipment Inspection)- DFID1048584s Facility for Oil Sector Transparency (FOSTER)- KPMG Professional Services on the Process and ForensicReview of Nigerian National Petroleum Corporation- HSBC Global Banking and Marketsbull Visited and reviewed selected operators and agencies ofgovernment covering the period from 1 January 2005 to 31December 2011 This exercise covered the Agencies andParastatals of the Ministry of Petroleum Resources theCentral Bank of Nigeria the Federal Inland Revenue Servicethe Nigerian Customs Service Nigerian National PetroleumCorporation and its subsidiaries International Oil Companies(IOCs) Local Oil Companies (LOCs) and other relevantpartiesOur detailed review supported by the Task Force1048584sconsultants covered an in-depth examination of the variousrevenue streams of Government across the variousresponsible agencies The review period covered was from 1January 2005 to 31 December 2011 in line with the Statute ofLimitations However where it was deemed necessary by
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
members of the PRSTF the scope was extended The reviewcarried out at the NNPC covered a period of ten(10) yearsinstead of seven (7) to enable the PRSTF determine keytrends in the determination of the FGN1048584s revenue and carryout better analysis of the status quobull Set up Two (2) Ad- Hoc Subcommittees namely NNPCReview Subcommittee and the DPR Review Subcommitteeto conduct an in-depth review and onsite consultations withthese two key agencies responsible for the management ofrevenues from the sector
CONFIDENTIALDRAFT46bull Set up Five (5) Standing Subcommittees with detailed ToRsemanating from the Task Force1048584s mandate This was toenable the Special Task Force follow up on the assertionsmade by the various stakeholders and organisations SeeScetion 33 for the membership and terms of reference ofthe Task Force1048584s constituted Subcommitteesbull Two workshops were held in the month of May 2012 tofurther assist the Special Task Force in the informationgathering process These were the (1) Workshop onMetering and Measurement in the Oil amp Gas Sector ValueChain and (2) Workshop on Security in the Oil and GasSectorbull In pursuance of ToR 2 the Task Force through the Securityand Enforcement Subcommittee liaised with relevant
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
agencies to validate the status of outstanding debts identifiedin the course of the forensic review and to demandpayments where deemed necessary4 Limitations and ConstraintsThe Task Force encountered some limitations in the course ofexecuting our terms of reference which in some casesconstrained the depth of the review or access to desiredinformation The key limitations are as followsbull Disputes between agencies on crude oil production dataleading to difficulty in ascertainmentbull Timey implementation of the country1048584s production datarepository said to be at pilot stagebull Some of the companies invited or circularised withinformation requests did not respond to the letters sent bythe Task Force requesting informationbull Given the time allocation for the Task Force1048584s work thereview and findings were constrained owing to the largenumber of companies and agencies that required reviewHowever the Task Force made all necessary efforts toensure a full execution of its mandate and our findings arepresented in the reportbull For crude oil sales a lot of the supporting documentationand information was provided towards the end of themandated time stipulated for the review In factinformation was still trickling in as at the time this reportwas being concluded It is key to note that the information
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DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT47was primarily paper based which would have requiredfurther extensions to conclude the reviews of certainDomestic Crude Oil Revenue Driversbull In the course of the work of the Task Force informationreceived was not sufficient to carry out a completeassessment of the cost versus the proceeds of sale for theentire 445000bbls domestic allocation by the FGNTherefore we cannot come to a meaningful conclusion inthis regardbull As at the time of reporting PPMC had not provided theTask Force with schedules of crude volumes that wasdelivered to the refineries and monthly analysis petroleumproducts available for sale (import and refined) This wouldhave facilitated an analysis of utilisation as well as anestimation of expected generated revenues from salebull The nature and scope of work was complex and variedleading to several related challengeso Given the volume of contracts under review fromexecution of FGN contracts (through the NNPC) withContractors (Oil Companies) including JOA PSC afurther time period would have been of benefito Differences of opinion between NNPC and DPRo Timely access to the records of NNPC1048584s strategicsubsidiaries 1048584 Napoil Calson Hyson NPDC NGCetcbull Information available from NNPC and NAPIMS in respectof the gas pricing model as well as natural gasproductionsale contracts with the various contractors wasdeemed inadequate by the Task Forcebull The Task Force was not provided with the gas supplysalesagreements between NLNG NNPC and NGCbull Reconciliation of the list of concessions and theconcessions per the detailed schedule of concessionrentalsbull The exact status of Royalties due created somedisagreement between agencies
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT48bull The sector wide need to independently track gas volumesproduced sold and flared by the operators5 Subcommittees1048584 Membership and Terms ofReferenceMemberships of the Task Force1048584s constituted subcommittees areas followsAd 1048584 Hoc SubcommitteesA NNPC Review B DPR Reviewbull Dr (Mrs) Omolara Akanji (Chair) 1 Mr Olasupo Shasore SAN(Chair)bull Prof Olusegun Okunnu 2 Ms Bennedikter C Molokwubull Rep of OAGF 3 Mallam Samaila Zubairubull PwC Consultants 4 Mr Ignatius Adegunle5 PwC ConsultantsStanding CommitteesA Revenue Subcommittee B Legal Subcommittee
1 Mallam Abba Kyari (Chair) 1 Dr Olisa AgbakobaSAN (Chair)
2 Pastor Ituah Ighodalo 2 Mr Anthony George-Ikoli SAN
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
3 Dr (Mrs) Omolara Akanji 3 Mr Anthony IdigbeSAN
4 Mallam Samaila Zubairu 4 Mr Olasupo ShasoreSAN
5 Mr BON Otti 5 Rep of FIRS
6 Rep of OAGF
7 Rep of FIRS
A IT and Automation D Security andSubcommittee Enforcement Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
5 Mr Anthony George-Ikoli SAN
A Report Writing Subcommittee
F 1 Ms Bennedikter C Molokwu (Chair)2 Prof Olusegun Okunnu3 Mallam Samaila Zubairu4 Mr Olasupo Shasore SAN5 Mr BON OttiThe Terms of Reference of the Sub-committees were defined asfollows
CONFIDENTIALDRAFT50Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceRevenueSubcommitteeCapture all Revenue lossareas resulting fromUnlawful activitySystem failureInadequate resourcesSundryEvaluate the fiscal regimes in
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
the sector and identifyrevenue leakage points andrecommend immediate stepsReconcile revenue paymentsdue and outstanding toGovernment across relevantagencies 1048584 NNPC DPR FIRSand the industry operators 1048584IOCs and LOCsPropose RevenueEnhancement initiatives andprogrammes for Government1048584sadoption in the sectorTORs 1 2 and 3
CONFIDENTIALDRAFT51Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceLegalSubcommitteeIdentify legal documentsgoverning the keyGovernment agencies with alltheir partners in Petroleum
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
revenue generationprocesses for all applicablefiscal regimesReview all legal disputesbetween Governmentagencies and industryoperators regarding revenuetax and other financialobligationsLiaise with the PetroleumIndustry Bill and Governanceand Control Task Forces toreconcile revenueexpectations with the legalframework being proposedPropose legislative reforms tosupport transparency inproduction and revenueautomationTORs 1 - 6Security andEnforcementSubcommitteeEstablish security andenforcement challenges as acritical contributor toPetroleum revenue lossesQuantify losses arising fromsecurity issues across thePetroleum industry valuechainDevelop a Security Masterplan to address all revenueloss issues identified in thePetroleum sectorTOR 2 regardingenforcement
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TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
TIALDRAFT52Committee Subcommittee Terms ofReferenceTOR Cross-ReferenceIT amp AutomationSubcommitteeEstablish the current status ofproduction automation in theNigerian Petroleum sectorProvide the Task Force with afunctional best practice casestudy on measurementmetering and automatedproduction monitoring forGovernment1048584s adoptionRecommend a short-termbridging solution to addressidentified issuesTORs 4 and 5Report WritingSubcommitteeCollate and integrate all theSubcommittee ReportsDevelop the framework of theTask Force1048584s Final ReportTOR 6Table 2 Subcommittees1048584 TORs
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Revenue Review andDebt Verification
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4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
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TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
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TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
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Revenue Review andDebt Verification
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56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
56
4 Revenue Review andDebt Verification1 IntroductionThis section of the report presents the findings of the PetroleumRevenue Special Task Force1048584s activities regarding the ToR 1 and2 which in effect involved determining and verifying all PetroleumUpstream and Downstream Revenues (Taxes Royalties etc) dueand payable to Nigeria and taking all necessary steps to collectall debts due and owingIt was determined that the main petroleum revenues due to thenational treasury in respect of oil and gas activities in Nigeria areas followsbull Domestic Crude Oil Salesbull Equity Crude Oil Salesbull Gas Salesbull Refined Petroleum Products salesbull Profits from NNPC subsidiariesbull Petroleum Profits Taxbull Company Income Taxbull Signature Bonusbull Concession Rentalsbull Royalties (Oil and Gas)bull Gas Flare Penaltiesbull Miscellaneous Oil RevenuesThe table below highlights the scope of this review and providesan overview of the agencies and revenue streams examinedPetroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencyUpstream Revenues 1048584Oil and GasDomestic Crude Sales NNPCEquity Crude Sales NNPCRoyalties (Oil and Gas) DPRConcession Rentals DPR
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
CONFIDENTIAL
DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT57Petroleum IndustrySub 1048584 sectorRevenue Streams ResponsibleAgencySignature Bonuses DPRPetroleum Profit Taxes FIRSGas Flaring Penalties DPRCompany Income Tax FIRSMiscellaneous Income 1048584Licensing Fines etcDPRMidstreamDownstreamRevenuesMiscellaneous Income 1048584Licensing fees etcDPRCompany Income Tax FIRSSale of Refined PetroleumProductsPPMCTable 3 Overview of the Agencies and Revenue Streams examinedThe following sections document the Task Force1048584s detailedfindings arising from the revenue review and verification exerciseaccording to each revenue stream9 Production1 Overview
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
Over the past 10 years NNPC1048584s record shows that the countryproduced an average of 842m bbls per year An official of Shell inNigeria told the task force that with adequate investment andgood security enforcement by the Nigeria1048584s production could beincreased to 13b1048584bbls annually Production quantities are used inthe determination of Royalties Taxes FGN1048584s entitlement etcThere are various agencies of Government that are charged withthe responsibility of monitoring the nation1048584s upstream activitiesThese include the DPR NNPC NAPIMS Nigeria CustomsService Pre-shipment Inspection Agents Nigerian PortsAuthority Navy and the Nigerian PoliceFor the purpose of determining Nigeria1048584s entitlement the TaskForce was told by NNPC1048584s Crude Oil Marketing Division thatstandardised contracts (1048584templates1048584) are used for each operatordepending on the agreement type (JOA AF CA MCA and
CONFIDENTIALDRAFT58PSC) With the aid of these templates production entitlements ofthe Federal Republic are determined This is reviewed at COMDperiodically for computation errors and adjustmentsInformation provided by the operators on production is acceptedas valid and the operators are relied upon for data on cost andproduction Non- operators are not expected allowed to visit theproduction location3 Findings
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
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DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
1 The basis used in determining actual production figures forfiscal purposesCrude oil royalties are determined on the basis of saleable crudeat the terminals which is not representative of actual productionProduction figures for the purpose of determining crude oilroyalties due to the nation1048584s treasury are derived from the metricreading taken at the terminals by the DPR officials Thesemeasurements are applied in a 1048584net back1048584 to map throughput backto well heads and fieldsMonthly reconciliations are performed between the DPR officialsand Operators to determine the final monthly crude oil productionfigures which is used in the determination of the final royalties dueper field10 Domestic Crude Sales1 OverviewThe Federal Government of Nigeria (FGN) allocates (on behalf ofNigeria) 445000 barrels of crude oil to NNPC daily out of thetotal crude oil production of the country for the purpose ofdomestic consumption hence the term 1048584Domestic Crude Oil1048584 Theallocation of 445000 barrels represents the installed capacity ofthe four (4) local refineries situated at Port Harcourt Warri andKaduna Liftings for domestic crude are made mainly from theEscravos and Forcados terminals which produce mainly BonnyLight and Forcados type of crude oilThe NNPC is required to pay the Federation for this allocation onthe basis of quantities lifted in any particular month and atinternational market prices A 3-month credit period is granted toNNPC to make the payment to the FGN
CONFIDENTIAL
DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
CONFIDENTIAL
DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT59In practice payments for domestic crude oil are madesubsequent to the conclusion of the monthly Federation AccountsAllocation Committee (FAAC) meetings5 Findings1 Remittance of amounts due to the Federation Accountrelating to Domestic Crude Oil allocationNNPC is responsible for domestic crude oil sales and theCorporation is meant to remit payments in this regard to theFederation Account through the Central Bank of Nigeria As at 31December 2011 N843 million was due to the Federation inrespect of Domestic Crude Oil allocations (Table 4) The amountsoutstanding as at 31 December 2011 represent amounts due forthe months of September 2011 to December 2011In view of the 90-day credit period the outstanding amount as at31 December 2011 was not due for payment The Task Forcehowever sighted evidence of subsequent payments in 2012Year VolumesliftedAv priceper bbl(US $)TotalValue$1048584mTotal ValueN1048584mSubsidiesdeductedN1048584mOtherReceiptsOtherDeductionsN1048584mNet PayableN1048584m2002 163610046 18 2945 323948 - - 323948 2003 157454064 23 3473 409753 - 25 409778 2004 151892709 37 5688 759693 - 1044 760738 2005 159898538 54 8704 1145361 - 1478 1146839 2006 157278731 62 10599 1277965 (232875) (19425) 1025665 2007 165858741 73 11531 1431176 (275177) - 1155999 2008 164723596 98 15562 1809452 (328118) - 1481334 2009 161913738 62 9903 1451586 260706) - 1190880 2010 166522807 80 13229 1954125 (414011) (13) 1540100 2011 164454254 111 18363 2776906 (732873) 8473 2052506 Table 4 1048584 Amounts payable paid and outstanding - Domestic Crude Oil
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
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DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
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DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
(Source NNPC)
CONFIDENTIALDRAFT60Sample selections were made across the 10 year period in orderto verify that the net amounts payable were remitted to theFederation account in CBN From the selections made it wasobserved that amounts remitted were most times different fromthe net payable amount (Table 5 below)From discussions with the NNPC the variances were attributed toother miscellaneous receipts from domestic gas sales and NGLsupplies which were also included in the remittances to theFederation account by the NNPCHowever further reviews showed that the negative differenceswere as a result of differences in computation of subsidiesPeriod AmountPayable(N1048584m)Amount Remittedas traced to CBNstatement(N1048584m)Variance(NGN million)May 2002 27001 26541 (460)June 2002 26541 26689 148August 2002 29686 29686 -October 2002 27806 24384 (3421)December 2002 28555 27563 (992)August 2003 42189 42740 551September 2003 43237 44141 904October 2003 67025 66615 (409)December 2003 40889 40914 25
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
CONFIDENTIAL
DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
CONFIDENTIAL
DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
January 2011 116440 114697 (1743)August 2011 108563 108592 29September 2011 197145 197917 772December 2011 227005 227262 257Table 5 Sample of Domestic Crude Oil remittances made 2002 1048584 2011 (SourceNNPC)Subsidies deducted by the NNPC per table 4 represent thedifference between the PPPRA approved landing cost and theNNPC retail price (excluding margins) multiplied by the PPPRAobserved volumes PPPRA subsidy approvals for the sale of
CONFIDENTIALDRAFT62refined products by the NNPC were in excess of deductions madeby about N1327 billion as at 31 December 2011At present subsidy is paid based on the difference between theproceeds from the sale of refined products and the cost ofimportation of refined productsIn the course of the Task Force1048584s work we did not receivesufficient justification and basis for the practice of deductingsubsidies from the amounts payable to the Federation AccountIndeed this practice does not accord with the law with particularreference to the Constitution42 Annual liftings of Domestic Crude AllocationsBased on the daily allocation by the FGN of 445000bbls it isexpected that NNPC would be allocated approximately 162million barrels annually Our review of the records receivedshowed an inconsistent pattern in the implementation of this
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
CONFIDENTIAL
DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
policy with variances found for the ten (10) years reviewedspanning 2002 to 2011 (See Table 6 below)3 Discrepancy in the pricing of Domestic CrudeThe average price per barrel payable by NNPC was comparedwith the average weekly prices for Nigeria Bonny Light Forcadosobtained from the Energy Information Administration (EIA) It wasunderstood from discussions with officials of the NNPC that thepricing of domestic crude oil during the period under review wasbased on international pricesThe review revealed that over a 10 year period (2002 1048584 2011)showed a difference of an estimated sum of US$ 5 billion asshown in the Table 6 belowYear Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2002 163610046 18 25 7 11452003 157454064 23 29 6 9792004 151892709 37 38 1 1524 See Section 162 which provides 1048584The Federation shall maintain a special account to becalled the Federatiion account into which shall be paid all revenues collected by theGovernment of the Federation1048584
CONFIDENTIAL
DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT63Year Volumes liftedAv priceper bbl(US $)Av priceper EIA(US $)Difference(US $)Valuation ofdifference (US$1048584m)2005 159898538 54 56 2 3202006 151193195 64 67 3 4542007 165858741 73 75 2 3322008 164723596 98 102 4 6592009 161913738 62 63 1 1622010 166522807 80 81 1 1672011 164276790 111 114 3 493Total 1613607224 5008Table 6 An analysis of the prices of Crude Oil per barrel (Source EnergyInformation Administration (EIA))Enquiries from NNPC revealed that up until October 2003 NNPCwas granted fixed price regimes by the FGN for the domesticcrude as followsbull 1999 1048584 2001 $950bblbull 2002 to July 2003 $18bblbull AugSep 2003 $22bblThis explains the wide disparity in prices in the earlier yearsFurther analysis showed specific examples of transaction withdisparities in price in later years4 The Exchange Rates used to remit payments in respect ofDomestic Crude to the Federation AccountDomestic Crude Oil is paid for in Nigerian Naira using CBNexchange rates It was noted that the exchange rates used inarriving at the Naira equivalent of the amounts payable differedfrom the CBN rates for six (6) of the ten (10) years reviewed Thepractice appears to have been stopped in 2006 it also appears tohave started again in 2011 The potential underpayment ofamounts payable to the Federation Account over the 10- yearperiod is estimated at N866 billion (Table 7)
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT64Year Volumes liftedAv priceper bbl(US $) Total value in (US$)Av exchrate (N$1)CBN yearlyaverageexchangerate (N$1)Diff(N$1)Valuation difference(Nm)2002 163610046 18 2944980828 110 120 10 294492003 157454064 23 3473418919 122 134 12 432882004 151892709 37 5687518809 134 133 (1) (5688)2005 159898538 54 8704165240 132 131 (1) (8704)2006 151193195 64 9891404099 126 127 1 98912007 165858741 73 11531242678 124 124 - -2008 164723596 98 15561979536 117 117 - -2009 161913738 62 9903033496 147 147 - -2010 166522807 80 13228939762 148 148 - -2011 164276790 111 18342657598 151 152 1 18343Total 86579Table 7 CBN exchange rates used in the conversion of Domestic Crude Oilpayments (Source CBN Website 1048584 Rates Archives)5 Utilization of Domestic CrudeFrom an analysis of annual domestic crude oil utilisation it wasrevealed that a greater proportion of the Domestic Crude Oil hasbeen channelled towards crude oil exportation exchange
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
transactions and offshore processing than for local refiningThe percentage of Domestic Crude Oil that is not refined incountryranges from between 50 to 88 over the 10 year period(Table 8)YearTotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2002 79 85 - - - 1642003 43 113 - - - 1562004 39 115 - - - 154
CONFIDENTIALDRAFT65Year
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
TotalRefineryQuantitym1048584bblsUnutilizeddomesticcrudeexportedm1048584bblsCrude Oil-Crude OilExchangem1048584bblsCrude -OilProductExchangem1048584bblsOffshoreProcessingm1048584bblsTotalQuantitym1048584bbls2005 72 84 4 - - 1602006 42 113 - - - 1552007 18 139 - - - 1572008 41 121 2 - - 1652009 19 143 - - - 1622010 35 98 1 6 27 1672011 45 39 - 56 24 164Table 8 Domestic Crude Oil Utilisation (Source NNPC)6 The Domestic Crude AllocationNNPC1048584s COMD sells to PPMC roughly 445000bpd of NNPC1048584sshare of crude to supply the nation1048584s four refineries PPMC isobligated to pay for this crude within 90 days using revenues fromrefined product salesIn recent years the refineries have operated regularly at below 50percent capacity PPMC has stated that all four are running at aloss due to several challenges- disrepair infrastructurevandalism and theft of crude and refined products COMDtypically sold the unrefined part of the 445000bpd on behalf ofPPMC on terms that are identical to other export transactionsThe Task Force1048584s review suggests that the dual agent-buyerstatus of any agency on sales to the refineries in several waysimpacts negatively State revenuesbull Subsidized salesNNPC sells domestic crude to itself at prices apparently belowmarket5 this creates a margin on crude sales to the refineries thatshould accrue to FGN and the Federationbull Exchange RatesPPMC declared domestic crude debts are below-marketexchange rates sometimes perhaps as much as 20 percent
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
under CBN publicly advertised rates for corresponding periods5 Observations of the NNPC sub committee from site visit
CONFIDENTIALDRAFT66bull Deferment of DebtsIn the mid-2000s domestic crude debts were deferred repeatedlyfor example according to NEITI published reports between 2004and 2008 total domestic crude debts outside the 90-day creditwindow grew from N15b to N588b Interest on debts outside the90 day credit window and infrequent delays sweeping paymentsinto the Federation Account6As its debt position worsened after 2009 NNPC also began usingthe non-refined portion of the domestic crude allocation in costlywaysbull Withholding proceeds from sales of exported domestic crudeoilThis practice began ostensibly to cover fuel subsidy costs NNPCitself has denied this publicly but our findings per Section 1241above shows NNPC withheld N1983trillion in subsidies between2006 and 2011bull Use of product swaps and offshore processingStarting late in 2010 a total of 27mbbls of non-refined domesticcrude was sent for offshore processing and 6 mbbls for crude oilproduct exchange (2011 24mbbls and 56mbbls respectively)The economics of these transactions are not clear and the taskforce was unable to deduce whether adequate value is generated
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
from these transactionsUltimately this combination of deferred receivables discretionarywithholdings and cashless contracts may constitute anunnecessary loss in revenues to the Federation11 Equity Crude Oil Sales6 OverviewThe balance of government1048584s share of crude oil production afterdeducting domestic crude is termed 1048584equity crude1048584 These crudesare obtained mainly from 3 types of arrangements which are1048584 Joint operating agreements with International Oilcompanies This may be modified by alternative fundingarrangements or modified carry arrangements which arises6 NNPC has acknowledged N450b worth of debt for unremitted domestic crude proceedsthrough end of 2009 It claims this sum represents a series of Presidential 1048584reprieves1048584 but thatit is now agreed a 32 instalment repayment plan
CONFIDENTIALDRAFT67as a result of the FGN1048584s inability to fully finance its share ofJV costs1048584 Production Sharing Contracts (PSC)1048584 Service ContractsEquity Crude Oil is required to be sold in the international marketat commercial prices by NNPC (COMD) and the proceeds areremitted into three (3) principal accounts1048584 Federation account as export proceeds
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
1048584 DPR accounts - Royalties1048584 FIRS accounts - PPTThe Task Force has carried out a review of crude oil sales fromthe various contract types7 Alternative funding agreements (CarryModified CarryAgreements)These are financing agreements in which International OilCompanies advance loans to NNPC for the purpose of investingin upstream projects This type of agreement arose becauseNNPC was unable to meet its cash call obligations under the jointoperating agreements As at 31 December 2009 outstanding JVcash call obligation was N459568billionUnder these agreements the companies take capital allowancesas allowed by the Petroleum Profit Tax Act to recover up to theapplicable rate of PPT for the calendar year of the principal Thisserves to reduce the taxable profit that is dueThe incremental notional margin is paid to the operators out of theincreased production from which their investment was madeWhere the investment does not yield the expected results thepayment is stopped NNPC has no liability for any financial lossincurred by the carrying party in respect of the projectThe carry oil recovery process covers only capital expendituresThe operating expenditures are funded by NNPC in accordancewith the joint operating agreementFor allocation of oil proceeds this is done in accordance with thefollowing priority (assume a contract between one operator andNNPC)bull volume of oil representing the operator1048584s participating interestshare shall be allocated to the operator
CONFIDENTIAL
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
DRAFT68bull carry oil shall be allocated to the carrying party to reflect itscarry interest share If the reimbursable carry expenditure(principal plus interest) exceeds the amount of carry oilavailable in any calendar year then the excess is carried overto the next calendar year andbull shared oil is shared between the carrying party and NNPC inthe agreed proportions In the earlier carry agreementsshared oil and carry oil are lifted by the operators In themodified carry agreements share oil and carry oil are liftedand marketed by NNPC on behalf of the carrying party andproceeds of sale is utilized for repayment of the carrying partyfor recovery of the reimbursable carry expenditureRecoverable carry expenditure and share oil can be carriedforward to the next calendar year The balance of NNPC1048584sequity allocation which remains after lifting and marketing byNNPC of the carry oilgas and share oilgas for and on behalfof the carrying party shall be for the account of NNPC The oiltaken as carry oil and shared oil by the carrying party istreated as equity production of the carrying party and subjectto PPT and royalty Consequently the full value of the oil liftedand owned by the carrying party is subjected to PPT androyalty as proceeds from sale of oil rather than considerationfor the disposal of assets to NNPC or tariff incomeWhen oil recovery from the projects reaches a certain levelNNPC and the operator are entitled to negotiate the shared oilratio8 Production Sharing ContractsThe Production Sharing Contracts are contracts where the NNPCas holder of all rights in and to the contract area appoints andconveys to a contractor the exclusive right to conduct petroleumoperations in a contract areaThe contractor provides funds and bears interests on the funds inaddition to bearing the risks of operating costs and risks requiredto carry out petroleum operations and therefore have aneconomic interest in the development of crude oil and natural gasdiscovered
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
Under the contract the available crude oil is allocated to theparties as followsbull Royalty oil is allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to actual royalty
CONFIDENTIALDRAFT69payable on the contract area during each month and theconcession rental payable annuallybull Cost oil will be allocated to the contractor in such quantumas will generate an amount of proceeds sufficient for therecovery of operating costs after allocation of royalty oil toNNPC All costs will be in US Dollars and recoveredthrough cost oil allocationbull The cost oil ceiling shall be 70 of available crude oil Therealizable price established shall be used in determiningthe amount of cost oil allocated to the contractor in respectof crude oil producedbull Tax oil shall be allocated to NNPC in such quantum as willgenerate an amount of proceeds equal to the PPT liabilitypayable each monthbull Profit oil being the balance of available crude oil afterdeducting royalty oil cost oil and tax oil shall be allocatedto each Party in the agreed algorithm7 Findings9 Single point accountability required
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
The Task Force observed that there is no single pointaccountability for the income and expenditure streams ofupstream petroleum operations This is also compounded by thecurrent structure of the NNPC and its agencies as detailedbelowbull The joint operating agreements and contracts with oilcompanies in petroleum operations are entered into byNNPCbull The responsibility for monitoring costs and the investmentsof the FGN in oil and gas upstream operations rests withthe National Petroleum Investment Management Services(NAPIMS) a strategic business unit of NNPC not a limitedliability companybull The responsibility for verifying the FGN1048584s share of crude oilproduction rests mainly with the Crude Oil StockManagement Unit (COSM) a unit of the Crude OilMarketing Division (COMD) of the NNPC with costconsiderations based on information provided by NAPIMSbull The responsibility for marketing and sale of crude oil(equity and unutilized domestic crude) is with the COMDbull Remittances of sales proceeds are made directly bycustomers into the CBN correspondent bank accounts with
CONFIDENTIALDRAFT70JP Morgan Chase which are subsequently swept into theFederation account This is monitored and tracked by
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
Group Finance NNPCbull Revenues from equity crude and costs incurred inupstream operations are recorded in the books ofNAPIMS which is separate from NNPC1048584s books ofaccountThe reconciliation process amongst the various groups listedabove is not clearly defined which makes it difficult and almostimpossible to have a single and holistic view of investments andthe returns thereto at any point in time10 Decline in national investment in the upstream sectorThe trend observed is that crude oil production has been in adecline over the 10 year review period This can be directly linkedto the fact that the nation has not made the necessaryinvestments that would increase the nation1048584s proven reserves(Table 9)The preparation and presentation of Financial Accounts forNAPIMS are presented as if NAPIMS was a single operatingbusiness entity or profit centre as opposed to a cost centre Thisgrossly contradicts the reality and its implications 1048584 that there isno strategic single point perspective of FGN1048584s investment andreturns in the Petroleum sectorYear JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2002 68798092011500555 4244744 6514425 30446536-7406871802003 79122792016718964 3483966 6819784 25900295-844150929 2004 84477051624399567 3886392 13042029 24057985-910156489 2005 83176344536711219 4317081 22015929 24915639-919723313 2006 662491651162532458 4013954 21693919 17680246784278869196506 2007 581468061192621306 3932714 15853124 8693895431608803000708 2008 546055056
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
CONFIDENTIALDRAFT71Year JV ProductionPSCProductionSCProductionNPDC JVProduction IndependentsMarginalFieldsTotalProduction2010 533683737316887117 2711402 21745142 201923533803447899023198 2011 526022734288141531 3994220 27541493 169748278080760870755565 Table 9 Country production of crude oil (Source NNPC)Also looking at Figure 2 variations in the FGN1048584s crude oilrevenues have been due principally to variations in crude oilpricesFigure 2 - Country production government entitlement government revenuesand market prices of crude oilVery little impact has been recorded from variations in crude oilproduction Despite the increase in crude oil production in Nigeria
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
over the years the nation1048584s entitlement has decreased as a resultof various alternative funding arrangements for its upstreaminvestments11 Legislation in the Petroleum IndustryLegislation governing the industry and agreements with thirdparties are outdated and do not reflect current economic or legalrealities This legislation includesbull Petroleum Act LFN 1990 LFN 2004bull Deep Offshore and Inland Basin Production SharingContracts Act LFN 2004bull Petroleum profits tax Act LFN 1990 LFN 2004 etcIn addition some legislation includes clauses that are ambiguousin current economic terms Examples are applicable rates forcalculation of royalties at offshore locations determination of
CONFIDENTIALDRAFT72realizable prices to be used in Royalty and PPT calculationstiming of capital allowances etc This creates variouscontroversies between the NNPC DPR and the oil companies asto the amount of royalties and invariably cost tax and profit oilWe found that there is need for certainty in the law as tocalculation of royalties as a way to avoid existing lingeringdisputesFurthermore there are some provisions within the legislation thatcould significantly improve government1048584s revenue that the
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
government is yet to take advantage of These include Section 16of the Deep Offshore and Inland Basin Act which provides thatbull The provisions of this Act shall be subject to review to ensurethat if the price of crude oil at any time exceeds $20 perbarrel real terms the share of the Government of theFederation in the additional revenue shall be adjusted underthe Production Sharing Contracts to such extent that theProduction Sharing Contracts shall be economically beneficialto the Government of the Federationbull Notwithstanding the provisions of (1) above the provisions ofthis Act shall be liable to review after a period of 15 yearsfrom the date of commencement and every 5 years thereafterProvisions of major enabling legislation governing the petroleumsector confer powers on the Minister to delegate the power ofregulation and supervision for effective performance of revenuesThe Task Force observed that these provisions have not beenutilised to vary the fiscal terms for production sharing contractsThe price of crude oil has long since exceeded $20 It seems thatpast administrations may have been worried about discouraginginvestment in deep offshore as a reason for lack of will to invokethe provisions of the Act But the fact today is that the initialreason for generous PSC terms which was risk of investment inan unproven basin no longer exists as Nigerian deep offshore hasbeen proven to contain vast reserves It is perhaps appropriatefor the present administration to take advantage of the Act to varythe terms of the PSCs so as to increase government take andenable the administration achieve its transformation agendaSections of the Petroleum Act and the Associated GasReinjection Act relating to prescription of fines and other revenuescan be delegated as such by the Minister in this regard77 See Section 9 of the Petroleum Act and Sections 3b and 5 of the Associated Gas ReinjectionAct for example
CONFIDEN
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
TIALDRAFT73The impact of these observations is a lack of clarity indetermination of government revenues and the lack of periodicreviews of legislation to ensure optimization of FGN revenues12 Crude sales to traders without formal contractsNNPC makes use of traders as middlemen for the exportation ofcrude oil and importation of petroleum products This logically willserve to reduce margins obtainable on sale of crude oil andincrease costs on purchase of petroleum products as comparedwith where the salespurchases are made directlyThe COMD annually requests for bids from oil and gas tradersThis forms the basis for the selection of traders to whomcontracts are signed covering a period of 1 year Table 10 showsthe number of traders engaged by NNPC over a ten year periodwith an over 100 increase from 22 in 2002 to 48 in 2011YearNo ofcustomerscontracts2002 222003 242004 242005 312006 312007 472008 282009 222010 402011 48Table 10 Summary of Lifting Contract Agreements (Source NNPC records)It was observed that the following traders lifted crude oil howeverthe companies could not be found as listed on the approvedmaster list of customers This suggests that Nigeria sold crude oilto certain traders without a formal contract8
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
8 Task Force could only establish formal contracts in writing if any oral contracts exist thereappears no record of same
CONFIDENTIALDRAFT74Year Names of customers without formal contracts2002 Tema Oil Refining Petrobras2003 Itochu2004 Crossoil Energem Petroleum Corporation2006 Ovlas Trading AMG Petro Energy2007Safiya Global Investments Ltd INC Natural Resources TristarEmo Oil Republic of Liberia JampS OFSI Ltd Petroleum Corp ofJamaica2008JampS Ommart Ltd Dainom Nig Ltd AMG Petro Energy TacorrRoger Princeton Rheinoel Ltd Sterling Oil ResourcesMakwande Alpha Petro Worldwide Abacus Ommart Ovlas2010 Sunoil Refinery GNPC JampS Mercuria2011SPOG Petrochemicals Sinclair Commercial Sullom Voe LiberiaPetroleum Tocomo Oil Centro Energy Republic of Benin EmoOil Arcadia Overt Energy Rheinoel Ltd Sarb EnergyTable 11 Customers without formal contracts (Source NNPC records)13 NNPC Crude Oil SalesCrude oil sales are a major source of government revenues Itmakes up roughly 70 percent of the Federation revenue NNPC1048584sCOMD sells government1048584s share of production10485841000000 bpd ormore1048584exclusively through one year term contracts Thesecontracts grant holders the option to lift a set allocation of crude at
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
Official Selling Prices (OSPs) COMD quotes OSPs monthly foreach of Nigeria1048584s 26 crude gradesFor the NNPC an average of 20 to 30 crude oil liftings take placeeach month with the standard lifting cargo capacity being at about950000 barrels In some years (2007 2010 2011) the numberof contracted customers significantly exceeded available stockeven though it was noted that there were some instances wherecustomers were sold less than the standard capacityFrom analysis of the list of customers provided over the 10 yearperiod the consistent customers were Addax Arcadia CalsonDuke Oil Glencore Indian Oil Company Ivory Coast NapoilPetrodel Sao Tome Senegal SINOPEC Trafigura and Vitol The
CONFIDENTIALDRAFT75Task Force research also found that quite a number of traders didnot demonstrate renowned expertise in the business of crude oiltrading These traders have lifted crude oil only once over the 10year period These are Abacus Oil AlphaPetro WorldwideCaligeria Oil Limited Dainom Nig Ltd Gembrook Energy LtdGlobal Gas and Energy Kingsbury Trading Makwande OmmartLtd Sinclair Commercial Ltd Tacorr Tempo Energy Tocomo OilWorldwide EnergyThe global trend is for national oil companies to develop their owntrading arms NNPC has created at least five trading subsidiariesof its own (Hyson Calson Napoil Duke Oil and Nigermed)however capacity is limited and most function as financial and
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
operational black boxesNNPC maintains that its sales model is sound and fetches Nigeriafair value for its crude However various submissions received bythe Task Force argued that the process was bureaucratic yet hadpotential for discretion waste and erosion of value in the nation1048584spetroleum revenues Specifically the Task Force identified thefollowing areas of concernFirst Nigeria is the world1048584s only major oil producer that sells 100percent of its crude to private commodities traders rather thandirectly to refineries as shown in the table belowSelling most crude directto end-usersRelying somewhaton tradersRelying totally or neartotallyon traders
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
IraqSudanIranAlgeriaKazakhstanVenezuelaNorwayMexicoUKEURussiaAngolaLibyaSingaporeGabonEquatorial GuineaCameroonColombiaCongo-BrazzavilleSouthern SudanNigeriaTable 12 Analysis of countries and use of crude tradersNo technical or commercial problems prevent NNPC from buildingits own full service trading desk which seems to be the preferredglobal best practice The Corporation1048584s use of oil traders raisesthe following issuesbull Lost marginsNigeria should ideally be capturing for itself the estimatedaverage margins of US$100000-400000 per cargo made bytraders COMD also awards a number of contracts each year to1048584briefcase traders1048584 with little or no commercial and financialcapacity These small local outfits then 1048584flip1048584 their cargoes to realtraders for a margin reportedly US$020 to US$040 per barrelSuch transactions add no value to the sector or the Nigerianeconomy
