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Wednesday, 22 February 2012

A Shocking Revelation From NNPC And PPPRA

President Goodluck Jonathan, last week, bowed to the wish of the Nigerian people by ordering a forensic investigation of the operation of the oil subsidy regime by the Nigerian National Petroleum Corporation, NNPC, and other related agencies. Diezani Alison-Madueke, minister of petroleum resources, officially invited the Economic and Financial Crimes Commission, EFCC, to investigate the agencies responsible for the management of the subsidy and determine “any incidence of malfeasance, fraud, over-invoicing, and related illegalities.” Consequently, the anti-fraud agency swooped on the NNPC Towers, notoriously referred to in Abuja as the “Four Towers of Corruption,” on Monday last week and carted away some documents from the relevant offices of NNPC and the Petroleum Products Pricing Regulatory Agency, PPPRA.

The magazine’s enquiries at EFCC revealed that the agency is examining the documents taken away from the agencies and would only make arrests after establishing definite infractions. This comes as the first integrity and competence test for Ibrahim Lamorde, the acting chairman of EFCC, whose name has been forwarded to the Senate for confirmation as substantive chairman. Wilson Uwujaren, spokesman for the agency, assured the magazine last week that EFCC has sufficient competence to examine the books of the relevant agencies but that if the need arises relevant experts could be invited for a second opinion.

Prior to the EFCC onslaught, the House of Representatives’ ad hoc committee investigating the administration of subsidy, headed by Farouk Lawan, began opening the subsidy’s Pandora’s box last Tuesday. Assisi Asobie, chairman, Nigerian Extractive Industries Transparency Initiative, NEITI, confirmed that payments made on fuel subsidy by the NNPC lacked transparency and did not follow due process.

According to him, “The system for recording the movement of refined products through the PPMC pipeline system were outdated (sic), paper-based, subject to error and not in line with the international best practice.” He revealed that instead of NNPC, like other petroleum marketers, drawing subsidy claims from the Central Bank of Nigeria through the Petroleum Equalisation Fund, PEF, after verification by PPPRA, it deducted its own subsidy directly from the domestic crude proceeds before remitting the balance to the Federation Account. “Payment should be made only on the approval of the AGF based on claims approved by PPPRA,” he said.

Asobie further revealed that during an audit of the oil and gas sector for 2006 to 2008 period, NEITI discovered inadequacies that complicated the problem of accurate determination of volume of imported petroleum products into the country. For in instance, during that period, the total oil lifted from the country was 8.8 million barrels, while NNPC lifted 4.8 million barrels. Since 2002, NNPC lifted domestic crude at market price, which Asobie regretted, provided incentive for export of domestic crude rather than domestic refining of the same. He feels that NNPC and Pipelines and Products Marketing Company, PPMC, should strengthen their control over product importation and distribution to check corruption.

Similarly, the Nigeria Customs Service, NCS also confirmed that NNPC contravened relevant laws in the operation of the subsidy. Julius Nwankwo, deputy comptroller-general, told the House Committee that NNPC does not make any documentation to the NCS in regards to the refined products imported into the country. He disclosed that several meetings were held where customs was directed not to ask for documents. Indeed, the ministry of finance wrote to the customs, warning them not to ask for documents because this “will cause crisis.”

According to Nwankwo, “Vessels imported into Nigeria are regarded as mother vessels. These mother vessels never get to the ports in Nigeria; they are normally anchored offshore. If you see the manifest covering these imports, what you will see is ‘offshore Cotonou, offshore Lome’. They never get to the ports; rather you have smaller vessels that pick these products from the mother vessels and they come to the port to report to customs in line with the enabling Act of Customs. The mother vessels do not report to customs and customs do not board the mother vessels. We can only board vessels anchored within our territorial waters.

TELL’s investigation not only confirmed NCS submission but found the major reasons NNPC and other marketers involved in the subsidy saga engage in this subterfuge. According to sources, this practice technically known as midstream discharge provides the cover for mind-boggling corruption which would be seen as treason in countries like China and Malaysia. The Nigerian Maritime Administration and Safety Agency, NIMASA, has been fighting midstream discharge but insider collaboration has so far sabotaged their efforts. It is alleged that some of the so-called major marketers are not actually importing any products; rather they are being supplied by suppliers, most of whom have no licence to import fuel into the country. In this widespread practice, the major marketers issue local purchase orders, LPOs, to all sorts of prospectors to supply them products, which they take delivery of midstream and, with the active collaboration of corrupt government officials, bring in and sell. It was found that these prospectors sell premium motor spirit, PMS, as low as N50 to the marketers and still make profit. Discharging midstream helps them evade paying the landing costs for the imported products.

Spread across the creeks and interior villages in the Niger Delta are illegal mini-refineries which refine crude oil into petrol, kerosene and diesel. Government failed to meet the domestic refining needs, leaving the gap for these ingenious local refiners to fill. The Nigerian Navy has been unsuccessfully battling these local refiners. The products of these illegal refineries are also sold to major marketers who claim subsidy on them. To obtain a standard product, the marketers blend it with well-refined fuel. This has compromised the quality of fuel being dispensed in the country and accounts for the greasy nature and foul smell of some grades of PMS being dispensed. Some have too high level of condensate, well above the three to one accepted in the industry.

Indeed, it is alleged that one of those at the upper bracket of the subsidy club has brought in only 30,000 metric tonnes, MTs of PMS into the country since 2010. “He did only one shipping in 2010 yet he gets some of the highest subsidy payouts; all other claims are false!” said a source.

According to other sources, this marketer is not the only one whose claims are false. Rather, it is a widespread practice. Under this practice, it was learnt that there is a collaborating company in Europe that issues fake documents for non-existent shipments and gives confirmation if enquiries are made in that regard. “Most of the companies actually do not import any fuel; the whole thing is a racket. They have enough in the black market to serve them,” alleged another insider.

Ironically, some high-ranking officials of NNPC are also alleged to be involved in the subsidy racket. It is alleged that in the name of evacuating products from Atlas Cove in Lagos to Escravos in Warri, Delta State, and Port Harcourt in Rivers State, some corrupt officials of NNPC sell the product to black marketers who now sell to Nigeria. “The chain of corruption starts with NNPC as a group and spreads to the subsidiaries,” regretted one source.

The subsidy cabal hijacked the system surreptitiously till they became very formidable through a number of ways. Some sources alleged that some of the beneficiaries are notable members of the presidential entourage on Grade A protocol list. Some of them travel with the President on foreign investment drives as Corporate Nigeria. There are highly placed insiders in government who collaborate with the cabal. According to some sources, known subsidy stakeholders in the downstream sector represent only 10 per cent government interest and 90 per cent self interest. They are easily used as tools for political manipulations. Some are members of important committees set up by the federal government to find solutions to various national challenges. Some are high-profile donors to campaign funds and some are present in most political jamborees.

The magazine reliably gathered that what some of the marketers do is to collect fake bills of lading and other shipping documents from cronies around the world and submit to the PPPRA. Prior to this, these fake documents would have been endorsed by the Department of Petroleum Resources, DPR. It is the duty of DPR to give permits to bring in refined petroleum products into Nigeria, stating the definite quantity, like 50 MTs monthly. So ideally, DPR should confirm the Bill of Lading by physical examination.

However, the practice now is that DPR has desk officers who confirm Bills of Lading right inside the office. A marketer just comes in, waves documents and announces that he/she has just brought in 50MTs, pays the right bribe and gets the papers endorsed. It was learned that it takes about N10 million to endorse such fake documents. “They are supposed to check both the quantity and quality but in actual practice they don’t; they take the supplier’s word for it. So it is very possible not to bring in anything and they will sign for you,” said one source.

After that, DPR then forwards the endorsement to PPPRA while the marketer presents the bill of lading to PPPRA. PPPRA determines the international price of PMS daily and based on that they determine the amount to be paid to each marketer as subsidy. PPPRA is responsible for paying subsidy, which is done through the Petroleum Support Fund, PSF. The marketer is supposed to supply the product to PPMC, which supplies to the public vendors.

According to an insider, PPPRA and DPR have never submitted to product supply audit, known in the Western world as chain distribution and supply. The Nigerian auditors they bring in are only allowed to do financial audit. A product supply audit will shock even the President at the level of corruption and subversion in both the up- and downstream sectors of the oil industry.

As it is below, so it is above. The corruption in the downstream sector is replicated in the upstream oil sector. Insiders insist that Nigeria produces much more crude oil than what is officially credited to it. Nigeria’s crude oil is said to be major contributor to the international black market stock. Officially, the international community has tried to treat illegal crude from Nigeria the same way it treats illegal diamond from Sierra Leone, known as blood diamond, in the international market. However, this has proved futile because the politics of oil appears thicker than that of diamond, which most people can do without.

Ibrahim Abubakar, a top Nigerian engineer, whose genius provided permanent solution to oil spill in Kuwait after the Gulf War, said that out of curiosity he conducted a private audit of Nigeria’s crude oil production in 2007/2008 and discovered that at peak, Nigeria produced 5,156,055 barrels daily. The investigation took him and his team round all the flow stations in the Niger Delta, including active and dormant wells and offshore and onshore facilities. According to him, the team used hi-tech equipment, which when attached at any wellhead captures its production history. Abubakar whose study has not been published told the magazine last Thursday that the output should be significantly higher today because of peace in the creeks and development of more oil wells.

His claim appears collaborated by the 2010 KPMG Report, which appears to have been killed. Sponsored by the Federal Ministry of Finance, the audit firm submitted its findings in a 40-page document entitled: Interim Report on the Process and Forensic Review of NNPC, which has been gathering dust on government shelf since September 7, 2010. According to KPMG, their review was necessitated by “recent reports of possible inaccuracies in the crude oil and gas revenues remitted to the Federation Account by the NNPC. The reports arose from allegations of wrongful deductions at source by the NNPC to fund its operations.”

In its findings, KPMG admonished NNPC on poor data management as information is stored on personnel (individual) workstations. The implications of this are potential loss of historical production information in event of staff turnover or system failure and difficulty in retrieving prior documents/reports. Insiders say what KPMG did not add is that this is deliberate as it makes the sharp deals easier to “bury” beyond any clever auditor.

On pricing, KPMG observed variances in crude sales price especially with regards to domestic sales to PPMC. “Crude sales to NNPC were at lower prices (lower than approved OSP) than to other off-takers which are not in compliance with government’s directive.” The implication of this, says the report, are sub-optimisation of crude sales revenue/potential revenue loss by the federation; non-compliance with laid down policies and procedures.

Still on fraudulent pricing, KPMG found that NNPC is guilty of round tripping. “NNPC is invoiced in US dollar for domestic crude allocations but is expected to remit the equivalent naira value to the federation account. However, we observed that exchange rates used by NNPC were lower than the average exchange rates published by the CBN during the review period.” Exchange rate variances for 2007, 2008 and 2009 were estimated at N25.7 billion, N33.8 billion and N26.7 billion respectively, using CBN rates for the month of transaction.

In its defence, NNPC claimed they obtained the exchange rates from CBN via phone but there was no document to substantiate the claim. The consequence is significant underpayment of domestic crude cost to the federation account.

It was also found that there were no uniform standards for contract awards and renewals by NNPC; rather these appeared based on “discretion.” Furthermore, the report confirmed the suspicion of many integrity agencies that the transactions in the oil sector are not accurately accounted for, leaving deep gaps for corruption and patronage. “We observed that crude oil sales and collections are not promptly captured on the accounting system. Typically, these transactions are captured in the accounting system after the transactions have been approved at FAAC meeting which is typically two months in arrears.”

What are the implications of this? Inaccurate sales and collection information on the financial systems and multiple data sources as data is predominantly managed outside the system; tracking and ageing of receivables would be performed manually; late detection of errors and absence of relevant audit trail and root cause analysis of adjustment not adequately determined and resolved.

On subsidy, the report found that “NNPC’s subsidy claims and PPPRA’s verification are based on volume of petroleum products available for sale (volume of products imported and actual production from the refineries) as against duly verified volume of products lifted out of the depots (volume of petroleum products sold) as stipulated in the subsidy guidelines.”

The implication of this is potential risk of subsidy payment on products not consumed by end users due to losses from pipeline vandalism, theft and even those not supplied. A rough estimation of subsidy payment on product losses for the period under review (2007-2009) is estimated at N11.8 billion. There was also the risk of payment of subsidy on locally refined products which is not the intent of subsidy and which may encourage inefficiencies in the refinery process.

It was also found that sometimes subsidy payouts are based on the whims and caprices of government officials. “There are instances of delays in receipt of subsidy advice from PPPRA resulting in the estimation of subsidy claims by NNPC (which brings about) over/under-deduction from proceeds of domestic crude sales.” Based on KPMG’s analysis, subsidy over-deduction for 2007, 2008 and 2009 was estimated at N2.0 billion, N10.3 billion and 16.2 billion respectively. They warn of a high risk of loss of subsidy adjustments trail specifically in instances of under-remittance.

The report tallied with the magazine’s findings on fraudulent movement of refined products from Atlas Cove. “We observed discrepancies in the volume of petroleum product import receipt at Atlas Cove Jetty in June 2010. While MTD reported a volume of 193,160 MT, Mosimi Area Office quoted a volume of 184,989 MT for the same transaction. Further evaluation of reports presented by MTD and Mosimi Area Office revealed that MTD’s figures were mis-stated. This results in incomplete and inaccurate recording and reporting of product receipts.”

Against the background of mind-boggling disclosures, Abubakar shares the same cynicism with most Nigerians that the corruption is too deep for Jonathan’s government to achieve the wholesome reforms Nigerians want. He may sack more than half of the top officials of the regulatory agencies and some of his ministers and aides. He may also have to put some friends, brothers and top party stalwarts and party financiers in jail if he is serious. Can the President be this far-reaching? Many critics do not think so. “Diezani (the minister of petroleum resources) won’t clean up anything; it’s just that the amount going to subsidy now is crazy and they fear that people will soon find out,” says Abubakar.

On its part, the executive is also on the warpath against big corruption in the oil and gas sector. The first salvo by Jonathan is the invitation of EFFC to delve into the case. Last Wednesday, the Federal Executive Council, FEC, chaired by the President added more gunpowder by awarding a N370 million contract through NEITI for a complete audit of Nigeria’s oil sector. However, Nigerians may not have enough patience to wait for the nine months it will take the companies to complete their work, so attention will be focussed on the National Assembly and EFCC. Whatever the outcome, things will never be the same again in the “Four Towers of Corruption.”

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