NNPC in public consciousness is synonymous with corruption, Adebayo Obajemu takes a look at the series of landmark corruption allegations that define the oil giant
KPMG in its report on corruption in NNPC gave a damning verdict. As far as the 41-page report is concerned, the NNPC is a cesspool of monumental corruption and fraud. The report detailed the corporation’s sharp business practices, violation of laid down rules and regulations, illegal deductions of funds belonging to the state, and failure to account for several billions of naira that should go to the federation account.
The agency, the report says, has also severely defrauded the country in subsidy claims. Auditors found that between 2007 and 2009 alone, the NNPC over-deducted funds in subsidy claims to the tune of N28.5bn. It has not been able to account for the sum ever since.
Now under President Buhari, there have been many allegations about corruption in the NNPC and the latest is the $25 billion contracts scandal involving the Group Managing Director of NNPC, Dr. Maikanti Baru. Dr. Ibe Kachikwu, minister of state for Petroleum had written to Buhari detailing many infractions, contracts scandal, and disregard for due process in contract award under Baru.
This government had promised to stamp out corruption, during the election; however, recent developments show that is corruption still present in the main institution that superintend the oil economy. Impunity which this government accused its predecessor of has assumed higher dimension.
The Federal Government, through the Federal Ministry of Finance, hired KPMG and another Nigerian auditing firm, S.S. Afemikhe & Co., in July 2010, to look into the books of the corporation following allegations of “wrongful deductions at source by the NNPC to fund its operations” by the 36 state governors.
There were also concerns at the time that “the procedures for managing and reporting the country’s crude oil and gas revenues are opaque and characterized by gaps, overlaps and inconsistencies in the role of key parties responsible for the assessment, collection and reporting on these revenue streams.”
Officials of the petroleum ministry and the NNPC, a source at the finance ministry disclosed, developed cold feet after the auditors were sent in, and indeed tried hard to frustrate the representatives of the two audit firms by failing to supply evaluation criteria for commercial bids submitted in respect of petroleum products importation.
Believing that would turn the auditors away, our source further explained, the corporation also failed to provide them with other relevant documents such as the criteria for allocation of products and product volumes to importers/suppliers and periodic prequalification list of approved products importers/suppliers. But in spite of the difficulty they faced, the auditors were able to determine that the NNPC had been anything but transparent in the management of our country’s oil resources.
The report that emerged from the audit was just too damning that the leadership of the petroleum ministry, the NNPC and some few other elements in the Federal Government have worked hard to keep it away from the 36 state governors and federal lawmakers in particular and Nigerians in general.
Stealing the states blind
In what is likely to anger state governors, the audit established that the corporation was in the habit of arbitrarily estimating subsidy claims and then over deducting funds from proceeds of domestic crude sales.
“For example,” the report said, N25bn was deducted as subsidy estimate for September 2009 from domestic crude sales proceeds while PPPRA approved a subsidy of N23.8bn; N35bn was also deducted as subsidy estimate from November 2009 but PPPRA approved only N21.3bn.”
The auditors’ analysis indicates “over-deduction for these two months amounted to N14.9bn. However, only N4.2.bn was swept into the Federation Account by the NNPC as adjustment for subsidy claimable in the two months.” That is beside the N11.8bn subsidy claim the NNPC claimed it paid for imported products that didn’t reach consumers.
State governors have always complained that the NNPC was shortchanging them through illegal deductions from revenues payable to the federation account.
Fraudulent underhand tactics
Over-deduction is however not the only way the corporation is defrauding the federal and state governments. According to laid down regulations, the NNPC is invoiced in dollars for domestic crude allocations but is expected to remit the equivalent naira value to the Federation Account. But auditors found to their chagrin that in doing that, the corporation used exchange rates far lower than those published by the Central Bank of Nigeria.
Using this “fraudulent underhand tactics”, the NNPC succeeded in cheating the three levels of government of a whooping N85.2bn in three years – N25.7bn in 2007, N33.8bn in 2008 and N26.7bn in 2009.When the auditors requested explanations for these exchange rate disparities, the NNPC claimed it obtained the exchange rates it used from the CBN via telephone.
The report also severely indicted the NNPC over the shoddy and non-transparent manner it renews crude sale contracts every year. The auditors noted that “evaluation criteria for renewal of contracts are not clearly stated in the contract document”, and that the selection exercises were based on individual discretion and wrong assumptions and criteria.”
The NNPC claims that renewal of contract was based on performance of off-takers (buyers). But the auditors observed that the basis and process for determining performance were not clearly defined. The auditors wondered why in 2007 and 2008, some companies not on the approved list of buyers for that year were allocated crude, a practice the examiners believe had led to crude being sold to non-credible buyers, even with relevant guarantees and safeguards not implemented.
Specifically the auditors queried the allocation of crude to Ovlas Trading (2, 852,316 barrels in 2007 and 906, 269 barrels in 2008) Petrojam (2,818,914 in 2007), Oil Fields (950,166 barrels in 2007) and Zenon (906,000 barrels in 2008) even when they were not on the list of authorized buyers for that year.
Contracts for the importation of products, the auditors wrote, were also routinely awarded without regard for approved guidelines and procedures. “We observed that contracts for the importation of petroleum products were awarded to companies and suppliers not listed in the approved prequalification list used for the fourth quarter 2008 importation,” the report noted.
The auditors specifically queried the award of contracts in that manner to Astana Oil Corporation Limited, Natural Energy and Oando, when they were not prequalified for patronage that year.
Among other forms of misdemeanour, ranging from poor accounting to shoddy record keeping, the auditors also indicted the corporation for leaving its own storage facilities, unused, and then proceeding to incur additional cost from leasing of third party storage facilities.
The auditors reported that DPK tanks (with storage capacity of 18,000 cubic metres) at the PPMC depots within the Mosimi Area had not been used for three years even though there were in good condition. Yet the corporation, the examiners added, had been leasing storage facilities from third parties.
In late 2013, Nigeria‘s then central bank governor Lamido Sanusi wrote to President Goodluck Jonathan claiming that the state oil company had failed to remit tens of billions of oil revenues it owed the state.
After the letter was leaked to press, Jonathan publicly dismissed the claim and replaced Sanusi, saying the banker had mismanaged the central bank’s budget. A Senate committee later found Sanusi’s account lacked substance.
Sanusi has since become Emir of Kano, the country’s second highest Islamic authority, and has smoothed over relations with the president. He declined to discuss his earlier assertions. Before he was sacked, though, the central banker submitted to Nigeria’s parliament more than 300 pages of documentation in support of his claim.
Reuters has reviewed that dossier, which offers one of the most comprehensive studies of waste, mismanagement and what Sanusi called “leakages” of cash in Nigeria’s oil industry. Detailed here, the dossier includes oil contracts, confidential government letters, private presidential correspondence and legal opinions.
Nigeria’s oil industry accounts for around 95 percent of the country’s foreign exchange earnings. If Nigeria continued to leak cash at the rate described in his letter to the president, Sanusi said at the time, the consequences for the economy would be disastrous. Specifically, the failure of state-owned Nigerian National Petroleum Corporation “to remit foreign exchange to the Federation Account in a period of rising oil prices has made our management of exchange rates and price stability … extremely difficult,” he wrote.
“The central bank of Nigeria is always blamed for high rates of interest,” but “given these leakages, the alternative is a devalued currency … and financial instability.”
That is exactly what has happened. As oil prices have plummeted to around $55 a barrel, half their level at the beginning of 2014, Sanusi’s successor Godwin Emefiele has devalued the naira, Nigeria’s currency, by 8 percent, and raised interest rates for the first time in more than two years.
Nigerian foreign exchange reserves are down around 20 percent on a year ago, while the balance in the country’s oil savings account has fallen from $9 billion in December 2012 to $2.5 billion at the start of this year, even though oil prices were buoyant over much of that period. Finance Minister Ngozi Okonjo-Iweala told reporters at a press conference in November that a significant portion of that money was distributed to the powerful governors of Nigeria’s 36 states instead of being saved for a rainy day.
Nigerians are rarely shocked by stories of billions going unaccounted for, or ending up with politically powerful individuals. Africa’s largest oil producer has for years consistently ranked towards the bottom of Transparency International’s Corruption Perceptions Index.
Sanusi handed his documents to a parliamentary inquiry set up last February to investigate the assertion in his letter that billions of dollars in oil revenue had not reached the central bank. He told the inquiry that state oil group NNPC had made $67 billion worth of oil sales in the previous 19 months. Of that, he said, between $10.8 billion and $20 billion was unaccounted for.
A spokesman for the president declined to comment on the specific contents of Sanusi’s dossier. He referred to a statement made at the time the banker was pushed out. It said the government “remains committed to ensuring integrity and accountability and discipline in every sector of the economy … And indeed we look forward to a situation whereby Mr. Sanusi will continue to assist the legislature in their investigations.”
Those investigations include a “forensic audit” of the oil industry set up by Okonjo-Iweala. The audit was given to Jonathan on Feb. 2 and he said he would hand it on to Nigeria’s auditor general. NNPC said on Feb. 5 it had received a copy of the audit, before it was made public. The firm said the audit cleared it of wrongdoing, although it found NNPC owed the government $1.48 billion for a separate shortfall.
The NNPC has consistently said it did nothing wrong. The oil company said last year that Sanusi’s allegations came from his “misunderstanding“ of how the oil industry works. The central bank is “a banking outfit … how will they understand petroleum engineering issues?” then managing director Andrew Yakubu asked journalists. “They are not auditors.”
Sanusi’s claims were seen by some Nigerians as part of the historic tensions between the country’s mostly Christian south and poorer, mostly Muslim north. Jonathan and oil minister Alison-Madueke are Christians from the oil-producing Niger Delta in the south. Sanusi is a Muslim from the country’s north, as is Muhammadu Buhari, a former military ruler of Nigeria who is the main presidential candidate running against Jonathan. The two regions have historically taken it in turns to hold the presidency. Since 2009, though, Jonathan has broken with this tradition.
Sanusi’s documents identify three key mechanisms through which Nigeria has allegedly allowed middlemen to channel oil funds away from the central bank. Among the recipients, Sanusi alleges, are government officials and high-flying society figures.
The three mechanisms are: contracts awarded non-competitively to two companies that did not supply services but sub-contracted the work; a kerosene subsidy that doesn’t help the people it is meant to; and a series of complex, opaque “swap deals” that might be short-changing the state.
Sanusi’s concerns around the first of these mechanisms centre on the 2011 sale by Royal Dutch Shell of its interests in five oil fields. The blocks were majority-owned by NNPC. The government, keen to end the domination of the oil industry by foreign oil majors, had been encouraging Shell and others to sell to local firms.
Shell sold its interest in the fields to companies in Poland and Britain. But the new owners did not get the same rights Shell had. To promote local control, the NNPC gave the right to operate the fields to its own subsidiary, the Nigerian Petroleum Development Company (NPDC).
Without soliciting bids, the NPDC signed “strategic partnership agreements” worth around $6.6 billion with two other local firms to manage them. One firm, Seven Energy, signed for three fields; another, Atlantic Energy, for two.
Seven Energy was co-founded in 2004 by Kola Aluko, an oil trader and Christian southerner. Aluko also co-owned Atlantic with another southerner, former oil trader JideOmokore. Atlantic was incorporated the day before it signed the deals.
Geneva-based Aluko is a high-profile member of Nigeria’s elite. He owns a fleet of supercars, including a Ferrari 458 GT2 that he races with Swiss team Kessel Racing. He also owns a $50 million yacht, according to Forbes magazine, and divides his time between a $40 million home in Los Angeles, an $8.6 million duplex on Fifth Avenue in New York, and homes in Abuja and Geneva. A colleague describes him as a ”work hard, play harder kind of guy. He’s extravagant. That’s just his style.”
Omokore has also become rich from oil and gas. Forbes has estimated annual revenue at another of his companies, Energy Resources Group, at $400 million. His jet-setting lifestyle is a regular feature in the local press. Omokore could not be reached for comment.
In May 2013, Nigeria’s parliament threatened to investigate the NPDC contracts because they were not issued through competitive tender. But the NNPC argued no tender was needed because the contracts involved no sale of equity in the oil fields; the probe did not go ahead.
Sanusi did not accuse Seven and Atlantic of any illegalities, but he did question why the NPDC chose those companies. His report said the deals’ only purpose seemed to be “acquiring assets belonging to the federation (state) and transferring the income to private hands.”
Asked about this, NNPC referred to the Senate report, which found that no-bid partnership agreements are not new. It also said that “it may be good policy to encourage indigenous players by giving them greater participation,” but called for such deals “to be conducted in a transparent and competitive manner.”
Seven did not comment. It says on its website its agreement with NPDC pre-dated the Jonathan administration and included an allowance for taxes. The company says it has invested more than $500 million, more than doubled production from its three blocks, and paid $48.8 million in taxes in 2013. Atlantic did not comment.
The second mechanism Sanusi’s report identifies as problematic is a decades-old state subsidy provided to retailers of kerosene, the fuel most Nigerians use for cooking.
Nigeria lacks the refining capacity to make kerosene, so imports it instead. The government then sells the kerosene to retailers at a cheaper price than the import price. This subsidy is meant to make kerosene affordable for the poor. In reality, though, retailers have long hiked prices so consumers pay much more than official levels.
In June 2009, Jonathan’s predecessor, UmaruYar‘Adua, ordered a halt to the scheme on the grounds that it was not working. But the subsidies carried on regardless. The NNPC told parliament last February that it still deducts billions of dollars a year from its earnings to cover it.
In his report, Sanusi called the kerosene subsidy a “racket” that lines the pockets of private kerosene retailers and NNPC staff. The report estimated the cost of the subsidy at $100 million a month. It said kerosene retailers – there are hundreds of them around the country – routinely charged customers much higher prices than the government pays to import the fuel.
Sanusi’s report included an analysis of kerosene prices across Nigeria’s 36 states over two years. It found that the government buys kerosene at 150 naira per litre from importers and then sells it to retailers at just 40 naira per litre. Sanusi’s analysis found consumers pay an average of 170-200 naira per litre, and sometimes as much as 270 naira.
“The margin of 300 percent to 500 percent over purchase price is economic rent, which never got to the man on the street,” Sanusi wrote.
NNPC said in a statement last year that it can’t force retailers to sell kerosene at the subsidised price.
The third mechanism Sanusi identified involves other types of refined petroleum products, such as gasoline. Like kerosene, these are also imported. Nigeria is Africa’s biggest oil producer but it depends on imports for 80 percent of its fuel needs because its refining capacity is tiny.
To pay for the imported products, Nigeria barters its crude oil. Sanusi’s dossier focuses on these barter exchanges, which are known as “swap deals.” The idea is that importers who bring in refined fuel worth a given amount receive an “equivalent value” in crude oil.
How that equivalent value is determined is unclear. Sanusi said he was uncertain how much, if anything, is lost in these deals. But he expressed concern at the sheer value of oil that changes hands and the lack of oversight. His report estimated that between 2010 and 2011, traders involved in swap deals effectively bartered 200,000 barrels of crude a day – worth nearly $20 million at average crude prices over the period – for a loosely determined equivalent value in refined products. It is impossible to tell, he said, if all the refined products were delivered, let alone if the terms were fair.
“It was clear to us that these transactions … were not properly structured, monitored and audited,” he wrote.
Sanusi wrote in his report that mismanagement and “leakages” of cash in the industry cost Nigeria billions of dollars a year.
Since the price of oil has fallen by around half since the start of 2014, such losses are even more significant. As it approaches elections, Nigeria faces plummeting oil revenues and a lack of buffers to shield the economy. Construction projects are on hold and the government is struggling to pay its sizeable workforce.