Nigeria: Mapping the labyrinth

Nigeria’s EITI provides evidence of an oil and gas industry in flux. According to the Nigerian Ministry of Petroleum Resources, 78 of Nigeria's 159 oil fields are located in the Niger Delta region (as seen from space in the image above).

As complex as it is large

Nigeria’s oil and gas sector is undergoing significant changes, battered by both global and domestic shifts. As a pioneer in the EITI globally, Nigeria’s EITI has long highlighted some of the significant leakages in the sector, particularly in transfers within government and in crude oil sales. It has also proposed bold reforms, many of which are now being implemented. Other areas have been left less clear, not least because some key players have resisted light being shone into their working arrangements.  

“Many of the present reforms in the Nigerian oil sector – including the discontinuation of the oil swap arrangements, the review of fuel subsidies, the restructuring of the national oil company, the review of contracts and the management of the joint ventures – are recommendations from the NEITI reports.

As well as the recovery of USD 2.4 bn of unpaid taxes and royalties, NEITI’s operations are on course to save Nigerians tens of billions of dollars through better management of the oil and gas sector”. 

Orji Ogbonnaya Orji, Former Acting Executive Secretary, Nigeria EITI

In deepening the EITI process in Nigeria and pushing the boundaries of implementation, the Nigeria National Assembly has resolved to table the recent NEITI Reports for open live televised debate beginning with the Senate any moment from now.  In preparation for the legislative debate, the Senate has invited the Executive Secretary of NEITI to brief it on the 2013 reports.

What could they discuss?

Mighty…

Until the recent production shut-ins that have almost halved production in 2016, Nigeria was Africa’s largest oil producer (over 800m barrels output in 2013). Yet its oil and gas sector was anyway changing amidst both global and domestic shifts. Buoyed by its own domestic output of the same sweet light crude, the United States has all but stopped importing crude from Nigeria since 2014, its fifth-largest supplier only four years ago. The once dominant international oil companies (IOCs) have increasingly divested from some onshore and shallow-water joint ventures with the Nigerian National Petroleum Corporation (NNPC) to focusing new investment on deep-water production with indigenous operators.

…complex

Despite its abundant reserves of over 37bn barrels of oil and 180tn cu.ft of gas, the sector has struggled to produce enough revenues for Nigeria to address its other challenges, from Boko Haram to insurgency in the Niger Delta. Government revenue from the sector fell by 8% in 2013 alone, due to crude oil theft, and much more since then. Oil price falls have also hurt.  Meanwhile wholesale reform of the sector through the Petroleum Industry Bill, under discussion for a decade, remains pending. As a result the NNPC, both a regulator and a cash-strapped operator, has had to innovate in its funding and refining arrangements, from third-party funding for joint venture operating expenditure (‘modified carry’) and strategic alliance agreements to crude-for-fuel barters (‘swaps’) and offshore processing agreement (OPA). Nigeria’s most recent oil and gas EITI Report, covering 2013, highlights some of the discrepancies in recording actual oil production across different government entities, such as NNPC, and companies.

Mapping the labyrinth

Nigeria’s EITI process is helping identify some key issues for reform. Given disagreements on pricing methods for crude oil sales, the 2013 NEITI Audit identified under-reporting of almost USD 600m in Federal Government tax (mainly Petroleum Profits Tax) in 2013 alone. The NEITI has also raised questions on NNPC’s agreement to barter crude oil against refined products with oil traders as well as its agreement with Cote d’Ivoire’s SIR refinery to process a share of Nigeria’s crude. The carrying forward of losses to NNPC from these swaps deals and OPAs was over half a billion dollars in 2013 alone. In exchange the country should have received higher amounts of refined products. In addition, the EITI found that NNPC and its subsidiaries had failed to transfer a total of USD 3.8bn to the Federation Account in 2013 alone. 

Although no bidding rounds have been held since 2007, concerns over how awards have been allocated at the discretion of the Minister of Petroleum Resources have been raised by NEITI. This has ranged from the discretionary awards of oil blocks by NNPC to its subsidiary the Nigerian Petroleum Development Co (NPDC), to a series of “strategic alliance agreements” which are complex agreements in which NPDC granted operation of certain blocks to private companies without transferring the licenses.

With state governments’ high degree of autonomy in the Nigerian Federation, oil-related transfers from central government play a major part in funding subnational budgets. While the 13% subnational derivation to oil-producing states was disclosed through the EITI, it has yet to be reconciled. 

Sustaining momentum

For all the welcome new light on areas for reform, differences remain in the figures. For example, the strategic alliance agreements are not clearly explained. In addition, the lack of a clear distinction between voluntary and mandatory social payments has tended to blur the lines between the spending companies and state-owned enterprises are required to make and their voluntary contributions. The EITI reporting process has also highlighted lack of disclosures by some key government entities and companies.

Nigeria’s upcoming Validation will provide a useful independent diagnostic of its efforts to shine more light into the murky sector.  In some ways these apparent gaps have been overcome by reforms over the past year: the strategic alliance agreements were cancelled and the swaps renegotiated in 2015, while NNPC has started producing more regular financial statements and the government has announced plans to break it up. Efforts to further entrench the EITI process in the government’s reforms will be key in preparing for Validation.