The Nigerian National Petroleum Corporation,(NNPC) has come under a fresh barrage of criticism for failing to recover full value for oil sold on behalf of the country over many years.
The Natural Resource Governance Institute (NRGI), a US based independent non profit organisation, in a report released yesterday, said the NNPC’s failure stems from poorly structured deals and unaccountable spending.
The most pressing problems with NNPC oil sales occur in five areas, according to NRGI. These are domestic crude allocation (DCA), revenue retention by NNPC and its subsidiaries, oil for products swap agreements, the abundance of middle men, and poor corporate governance and oversight.
Concerned about governance, transparency, the report calls for reforms in the swap agreement regime, stating that the Refined Product Exchange Agreements (RPEA) or swap agreements met global standards.
“Oil sales are Nigeria’s biggest revenue stream, but management has worsened in recent years,” said Aaron Sayne, co-author of the report with Alexandra Gillies and Christina Katsouris. “By our estimate, just three of the problematic provisions in a single swap contract may have cost the government $381 million, or $16.09 per barrel of oil, in a single year.”
The report suggests eliminating the DCA, selecting buyers through competitive, rather than political processes, and changing the type of swap agreement the NNPC uses.
Currently, the NNPC routes around 210,000 barrels per day, or one-tenth of the country’s entire production, through deals with unacceptably high governance risks, according to NRGI.
Seven swap deals worth $35 billion have been signed between 2010 and 2014.
Recent offshore processing agreements (OPAs) contained unbalanced terms that did not efficiently serve Nigeria’s needs because imports from such arrangements are vulnerable to downstream rackets around Nigerian fuel transportation, distribution and sales, NRGI said.
Future swaps should be competitively awarded Refined Product Exchange Agreements (RPEAs), (such as NNPC had with firms like Taleveras Petroleum Trading, through its subsidiary, Duke Oil Incorporated BV) however with stronger terms.
The DCA (in which the government allocates around 445,000 barrels per day to NNPC) was designed to feed Nigeria’s refineries, but in practice NNPC exports three quarters of the so-called domestic crude.
In addition, NNPC’s discretionary spending from domestic crude sale revenues has skyrocketed, exceeding $6 billion a year for the 2011 to 2013 period.
NNPC has also invented a makeshift system for financing its operations, and is discretionarily retaining ever-growing sums.
The report says NNPC’s five oil trading subsidiaries (Duke oil Company, Duke Oil services, Calson Ltd, Hyson Ltd, and Napoil Company Ltd) have acquired no independent trading capacity, but act as passive middlemen on large sales volumes (144,010 barrels per day in 2012, worth $5.9 billion).
NNPC does not disclose what happens to the commissions earned by the subsidiaries on these sales, according to NRGI.
The report details how NNPC is increasingly withholding large sums of money from the Nigerian treasury and outlines the complicated flows of currency, oil and fuel, and highlights junctures at which value is lost and funds are unaccounted for.
Records indicate that NNPC retained an estimated $12.3 billion from the sale of 110 million barrels of oil over ten years from a single block controlled by a subsidiary.
In 2013, the Nigerian treasury received only 58 percent of the value of the $16.8 billion worth of oil NNPC had earmarked for its underperforming refineries.
Meanwhile, as average prices for the country’s light sweet crude topped $110 per barrel during the boom of 2011 to 2014 during that same period, treasury receipts from oil sales fell significantly.
“NNPC’s approach to oil sales suffers from high corruption risks and fails to maximise returns for the nation. These shortcomings also characterize NNPC as a whole. Over 38 years, the corporation has neither developed its own commercial or operational capacities, nor facilitated the growth of the sector through external investment. Instead, it has spun a legacy of inefficiency and mismanagement,” the report said.
“Despite NNPC’s debilitating consumption of public revenues and performance failures, successive governments have done little to reform the company.”
The current time is an opportune one to reform the NNPC which sells approximately one million barrels of oil a day, according to NRGI.
“The combination of a new government and the current budgetary shortfalls offers Nigeria its best chance in years for overhauling NNPC’s oil sales. The status quo is unaffordable,” said Gillies.
The Natural Resource Governance Institute, works with government ministries, civil society organisations, journalists, legislatures, private sector actors, and international institutions to promote accountable and effective governance in the extractive industries.