Deconstructing PwC’s forensic audit of NNPC account

PriceWaterHouse Coopers (PwC) in its forensic audit reports asked Nigerian National Petroleum Corporation (NNPC) and the Nigerian Petroleum Development Company (NPDC) to refund to the Federation Account “a minimum of $1.48bn,” representing about N274.54bn at the Central Bank of Nigeria’s inter- bank exchange rate of N185.50 to the dollar. The President while receiving the report from the accounting firm, requested the Auditor-General of the Federation to study it and make the key highlights public within a week. PwC was last year hired by the Federal Government to carry out the forensic audit of the NNPC following an allegation by the former Governor of the Central Bank of Nigeria, Lamido Sanusi, that $49bn was not remitted to the Federation Account by the corporation. Sanusi, now the Emir of Kano, had written a letter to Jonathan that $49bn was not remitted to the Federation Account by the NNPC; He later 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. Sanusi had identified three key mechanisms through which the oil funds were fleeced away; crude oil swaps, kerosene subsidy and strategic partnership agreements. Opaque crude oil swaps Nigeria despite its huge oil re- sources depends on imports for over 80 percent of its petroleum products needs because it’s low refining capacity. To pay for the imported petroleum products, Nigeria barters crude oil for the refined products. The idea is that importers who bring in refined fuel worth a given amount receive its equivalent value in crude oil. However, Sanusi had alleged that how that equivalent value is determined is unclear but he ex- pressed 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 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. Kerosene subsidies In June 2009, the then President Umaru Yar’Adua, ordered a halt to kerosene subsidy on the grounds that it was not working. However, the kerosene subsidies went on. The NNPC told the National Assembly in February 2014 that it still deducts billions of dollars a year from its earnings to cover kerosene subsidy. The model for kerosene subsidy requires that government sells the kerosene to retailers at a cheaper price than the import price. This subsidy is meant to make kerosene affordable for the poor while in reality, most of the kerosene products are diverted for use as aviation fuel while the ones that get to the retailers have long hiked prices so consumers pay much more than official levels. Sansui’s report estimated the cost of the subsidy at $100 million a month. 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 whereas consumers pay an average of 150-200 naira per litre. Strategic partnership agreements Strategic partnership agreements refer to the mechanisms used for the 2011 sale of interests in some 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 international oil companies (IOCs) 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). NPDC then signed “strategic partnership agreements” worth around $6.6 billion with local firms to man- age them. In May 2013, the National Assembly threatened to investigate the NPDC contracts because they were not issued through competitive tender. But the NNPC argued that no tender was needed because the contracts involved no sale of equity in the oil fields; the probe did not go ahead. What the forensic audit said PwC stated that while the total gross revenue generated from crude oil lifting was $69.34bn between January 2012 and July 2013 and not $67bn as earlier stated by the Senate Reconciliation Committee, what was remitted to the Federation Account was $50.81bn and not $47bn. Of the $69.34bn, the audit report stated that $28.22bn was the value of domestic crude oil allocated to the NNPC, adding that the total amount spent on subsidy for Premium Mo- tor Spirit amounted to $5.32bn. The report also concluded that an un- appropriated amount of $3.38bn that was spent as subsidy on kerosene in the period. Other third party financing arrangement and equity crude oil pro- cessing costs amounted to $1.19bn. Total costs directly attributable to domestic crude oil amounted to $1.46bn. Other cost incurred by the corporation not directly attributable to domestic crude is $2.81bn. Revenue attributable to the NPDC as submitted by the former managing director to the Senate hearing was $5.11bn which PwC said needs to be incorporated into the financial statements of the NPDC from where dividend should be declared to the Federation Account. Signature bonus, Petroleum Profit Tax and royalty yet to be paid by the NPDC is $2.22bn. The report stated that NNPC “operates an unsustainable model” as 46 per cent of proceeds of domestic oil revenues for the review period were spent on operations and subsidies. “The corporation is unable to sustain monthly remittances to the Federation Account Allocation Committee and also meet its operational costs entirely from the proceeds of domes- tic crude oil revenues, and has had to incur third party liabilities to bridge the funding gap.” The report stated that while the NNPC provided transaction document, representing additional cost of $2.81bn related to the review period, there was a need to clarify whether such deduction should be made by the corporation as a first line charge before remitting the net proceeds of domestic crude to the Federation Ac- count. PwC recommends that the NNPC model of operation must be urgently reviewed and restructured, as the current model, which has been in operation since the creation of the corporation, cannot be sustained. On the ownership of NPDC revenues, the PwC report stated that the organisation should remit dividends to the NNPC and ultimately to the Federation Account based on its dividend policy and declaration of dividend for the review period. On kerosene subsidy, the report stated that while the Petroleum Products Pricing Regulatory Agency and the NNPC relied on a presidential directive of June 15, 2009 to stop subsidy on kerosene, the directive was not gazetted, and as such, there was no legal instrument cancelling subsidy on the product. The report, therefore, recommended that an official directive be written to support the legality of the kerosene subsidy cost to be followed by adequate budgeting and appropriation for the costs.