Challenging times for Africa’s biggest oil producer as revenues fall.
Days after the momentous Nigerian Presidential election in March, Nigeria published its 2012 Oil and Gas report, which shows the sector continues to play a significant role in the economy, accounting for 13% of GDP and 77% of total revenue to the federal government.
Nonetheless, in 2012 the sector saw a fall in total revenue for the first time since 2009. This was in line with a drop in production from 866 million barrels in 2011 to 863 million barrels in 2012. Total sector revenue dropped by 8% from USD 68 billion in 2011 to USD 63 billion in 2012, mostly attributed to crude theft, and sabotage and pipeline breakages. Sales of oil and gas intended for exports dropped by 13% from USD 25 billion to USD 22 billion.
Oil producers lost over USD 2.6 billion worth of crude oil due to theft and sabotage. Sabotage also led to further losses worth billions by deferring production.
Increase in corporation tax
Despite the fall in total revenue, corporation tax from the sector increased 31% from USD 8.2 billion in 2011 to USD 10.7 billion in 2012, due in part to the additional commitments to the government by oil companies for their investments in joint venture operations. An examination of this revenue stream, however, revealed an underpayment of USD 690 million, which the report claims is owed to the government.
A long standing dispute over pricing methodology needs to be addressed quickly for the citizens to benefit from the oil and gas sector. The report concludes that under-pricing of crude oil by companies increased 67%, from USD 154 million in 2011 to over USD 465 million in 2012. This ongoing dispute has resulted in a loss of over USD 4 billion in the last seven years.
Additionally, USD 589 million in crude oil intended for exports was unaccounted for in 2012, and at least USD 9 million was lost in domestic crude sales due to the use of agreed prices, which differed from the official prices.
The federal Government’s subsidy to ensure a stable supply of petroleum products on the domestic market was recorded as USD 9 million, which the EITI report defines as high. Whilst the subsidies to the sector fell considerably, saving the Government USD 2bn in2012, many activists including PWYP-Nigeria continue to call for them to be removed.
Nigeria National Petroleum Company under scrutiny
The report contributes to the on-going debate about the role and management of the Nigeria National Petroleum Company (NNPC). It claims that NNPC has accumulated a USD 7.6 billion debt to the federal government, as it has not paid in full for the crude oil it buys from the government for domestic use. The report calls for NNPC to pay this debt. NNPC has argued that this sum has been duly held by the company for subsidies and different operating costs. The company deducts domestic fuel subsidies from the sum it pays to the government, which is however taken into account in NEITI’s calculations. Subsidy deductions are a highly controversial issue, as NNPC is yet to show that the subsidy claims it made in 2009-2011 had been authorised.
Another contested issue is whether NNPC owes dividends it receives from the gas company NLNG to the government, or whether it is entitled to keep the funds. By the end of 2012, these dividends amounted to USD 11.6 billion. NNPC claims that it has a right to keep the funds and use them for gas projects. The report urges NNPC to transfer its operating surplus to the government, as required by law, and recommends that NEITI carries out a further review to investigate the issue.
These findings demonstrate well why increasing understanding of the rules and practices regarding the financial relationship between the state and state-owned companies is key for improving extractive sector governance.
NNPC urged to privatize local refineries
Low capacities at local refineries undermine the Government’s ability to meet local demand for petroleum products. Only 35 million out of a total allocation of over 162 million barrels was processed in the country in 2012. Crude oil allocated for local production are often exported or exchanged for refined products at prices lower than the per barrel price for exported crude oil. Where crude oil was swapped for refined products, it was estimated that the Federation lost USD 107 million in 2012.
Overall, the arrangements which involved product importation in exchange for crude oil has shown to be inefficient, the EITI report calls on the Nigeria National Petroleum Corporation (NNPC) to privatise local refineries.
Disclosing beneficial owners
Significant efforts were made towards revealing those individuals who own or exercise control over oil companies in Nigeria. Of the 44 companies reporting, 42 provided information on their beneficial owners, which were corroborated with the government’s own database. While this is major step in the right direction, more work will be need to see if these are the actual owners or proxies.
There are indications that improved documentation and record keeping within the sector is yielding good results. The total difference between companies' payments to the Government and what the Government received dropped to USD 47 million in 2012 – just 0.1% of the total.
In addition, the report indicates a significant reduction in the volume of gas flaring.
Opportunity for the new Government?
President-elect Muhammadu Buhari has indicated implementation of the recommendations of the NEITI reports as one of his key priorities. The key recommendations arising from this report include:
- ensure that mony due to the federal Government from oil mining leases (OLMs) are remitted to the Federation Account;
- that the Nigeria National Petroleum Company complies with the provisions of the Fiscal Responsibility Act that 80% of operating surpluses are paid to the Consolidated Revenue Fund;
- allocate domestic crude based on the actual capacity of the refineries, and privatize the refineries;
- agree on pricing methodology with the companies; and
- discontinue the crude oil product swap arrangements and concentrate on direct importation of refined products.
These recommendations are due to be considered and actioned by an inter-ministerial task team of the key ministers.
Mr Buhari knows his government is being watched, but is trying to lower expectations. "How can I promise miracles?" he said to The Economist.
Please note: the section "Nigeria National Petroleum Company under scrutiny" has been added to this article on 16 April, at 11:33 CET.