Is Nigeria Missing $50 Billion? Some Considerations

Nigeria's latest oil scandal has erupted, and it's a big one. This week, an online media outlet leaked a letter from the country's central bank governor to the president accusing the national oil company of failing to transfer $50 billion in oil revenues to the treasury between January 2012 and July 2013.

Allegations of mismanagement and revenue leakages in Nigeria's oil sector are hardly uncommon. Recent reports – including several commissioned by the government itself – have documented dysfunction and inefficiencies in the system, including in how the national oil company sells oil. Nigeria scores a weak 42 of 100 on the 2013 Resource Governance Index, ranking 40th of 58 countries assessed.

The big news here is the staggering scale of the allegedly missing funds. Is it really possible that these governance problems cost the country $50 billion in just 18 months?  This breathtaking number is more than half of Nigeria's annual government revenues, nineteen times greater than the federal education budget, and larger than the GDPs of all but three sub-Saharan African countries – all in a nation where 140 million people live on less than $2 per day.  

As members of the press jockey to verify these claims and the national oil company disputes the allegations, it is worth pausing to examine what might be going on, and suggest some courses of action.

Understanding the claim

Oil generates over 75 percent of Nigeria's total government revenues, and these revenues are collected in several forms. The Nigerian National Petroleum Corporation (NNPC) sells over half of the country's oil production, and the proceeds constitute the largest revenue stream. From 2009 to 2011, 57 percent of total oil-related revenues came from oil sales, compared with 33 percent from taxes, and 9 percent from royalties.

NNPC sells the state's share of oil, and the proceeds enter the national treasury's “Federation Account.” The central bank governor now contends that during the 18 months in question the sale proceeds should have totaled $65 billion, an amount calculated from export documents that show NNPC sold 594 million barrels of crude during that period. But, according to the letter, only $15.5 billion entered the treasury. The difference is the allegedly missing $50 billion.

If the claim is correct, it is unlikely that NNPC officials carried away $50 billion in briefcases or wired it all off to private accounts. Rather, such losses are more likely to have been embedded in the country's oil sale processes. These processes feature undue complexity, extensive discretion and well-documented flaws. In such a system, the line between mismanagement and corruption is difficult to draw, as shortcomings in process often benefit specific private interests. What has been clear for some time is that NNPC oil sales fail to maximize returns for Nigeria and are susceptible to corruption. But is it really possible that these processes have grown so decayed that 600 million barrels of oil, worth over $60 billion, netted only $15 billion in revenues for the state?

Potential, partial explanations for missing billions

Explaining how money might go missing in a corrupt, secretive and discretionary system is inherently guesswork. As Nigeria's 2012 fuel subsidy scandal illustrated, process inefficiencies can swiftly balloon into massive scams if conditions are right. What follows is a discussion of a few factors which might constitute ingredients in an explanation for a $50 billion loss in oil sale earnings. Far from an airtight theory, they illustrate the kinds of processes that can easily allow significant revenue leakages.

In refuting this week's accusations, NNPC protests that it is responsible for transferring the proceeds from only certain types of oil sales. Some companies pay a portion of their tax and royalty bills in the form of oil, rather than in money. While NNPC sells this oil, it suggests that other agencies are responsible for remitting the earnings to the Federation Account, and that this helps explain the massive shortfall. However, according to reports from the Nigerian Extractive Industries Transparency Initiative (NEITI), tax and royalty oil constituted 17 percent of total NNPC oil sales from 2009 to 2011. The remaining amount – the vast majority – came from the sale of “equity oil,” or the oil that NNPC receives because it owns a majority share of several highly productive licenses. For instance, in 2011, equity oil sales brought in $37 billion out of a total $45 billion in oil sale earnings.

With this data in mind, equity oil revenues alone should have totaled much more than the paltry $15 billion that apparently entered the Federation Account in 2012 and early 2013. Moreover, it is unclear why the proceeds from selling tax and royalty oil would remain with the tax authority (FIRS) or industry regulator (DPR), as implied by NNPC's statement, since all revenues are required to enter the Federation Account.

Since this early explanation from NNPC does little to dispel concern, what are other factors that could potentially lower the oil sale revenues received by the government?    

First, NNPC habitually owes the country money. NNPC itself buys 450,000 barrels per day in oil, the so-called “domestic crude allocation.” Some of this oil goes to the country's refineries, while the rest is exported to help pay for the fuel subsidy. The allocation likely totaled around 245 million barrels over the 18 months, or 40 percent of total oil sold. From 2009 to 2011, NNPC failed to pay in full for the oil it bought. The company's resulting debt to the state during this period averaged around $7 billion. Moreover, NNPC uses favorable exchange rates to calculate how much it owes, practices documented by Petroleum Revenue Special Task Force, NEITI and KPMG reports. If NNPC slowed in paying for its crude in 2012 and 2013, and received even more favorable discounts, this could help to explain a revenue shortfall.

Second, NNPC diverts some crude sale revenues to the “cash call account” from which the company pays for operational costs associated with its shares in six large upstream joint ventures. From 2009 to 2011, allocations for cash calls averaged $5.6 billion per year. In addition to paying for joint venture expenses, NNPC makes discretionary withdrawals from the cash call account to pay for expenses like presidential helicopters and military operations in the Niger Delta. Sharply rising allocations to the cash call account could also help to explain the gap.

Third, NNPC increasingly relies on unorthodox and opaque deals to sell its crude. In 2011, NNPC commenced “swap” deals in which it exchanged crude for refined petroleum products like gasoline. By 2012, $6 billion worth of oil was sold through this new method. Also, NNPC now sells over a quarter of its oil under “alternative financing arrangements,” agreements through which NNPC borrows money from its foreign oil company partners and repays it through a range of financial and in-kind methods. The sale of tax oil has increased drastically too, from $8 billion worth in 2009 to $28 billion in 2011. If these atypical sales are vehicles for corruption or otherwise generate lower than normal returns, they too could also help explain major losses.

Fourth, parts of NNPC's oil sale system are not well suited to maximizing revenues. Moreover, they feature complexity, high degrees of political interference, discretion, secrecy, and an absence of oversight–conditions conducive to the kind of deals that benefit individuals rather than the country. Unlike most major oil producers, NNPC sells its oil to commodity traders, introducing unnecessary middlemen into its transactions. These buyers include secretive international traders as well as Nigerian “briefcase” companies that serve as fronts for other entities. The Berne Declaration, a Swiss watchdog group, recently drew attention to these shortcomings. Along with the over-reliance on traders, it criticized the practices of several NNPC joint ventures—so-called “operational and financial black boxes” that registered in tax havens and feature partnerships between NNPC and Swiss oil traders. These entities buy and sell NNPC crude, but no information is available about whether they remit profits to the government. Just as this murky sales environment enables the physical theft of oil  (estimated at around 100,000 barrels per day), it also provides another potential explanation for low sale revenues from the oil that NNPC does collect and sell.

If these factors, along with others not yet apparent, led Nigeria to lose $50 billion in potential revenues over just eighteen months, oil sector governance has plummeted to historic depths – even for a country that has brooked such offenses for decades.

What should be done?

Simply put, the politicians and officials who control NNPC need to conduct oil sales in a manner that advances the aspirations of Nigeria's 160 million citizens. In a highly centralized and discretionary system like Nigeria's, only shifts in political will reduce the risk of multibillion-dollar revenue leakages.

More modestly, and in the near term, the following actions could help:

Tangible reform. Nigeria's Petroleum Industry Bill, pending in one form or another since 2008, has become a red herring for oil sector reform. All the reports from the last few years (from NEITI, the Petroleum Revenue Special Task Force, KPMG, various legislative probes, international actors like Revenue Watch, the Berne Declaration and Global Witness, among others) point to specific steps that the government can take to increase oil revenues. Nigeria cannot wait for the passage of an unwieldy and potentially ineffective law to address such urgent matters. Rather than more inquiries, commissions and promises about legislation, President Jonathan's administration should make tangible progress in tackling specific oil sector weaknesses during the remainder of its term.

Explanations. Nigerians should not have to guess whether more than half of their country's oil revenues are missing. Rather than piecemeal refutations, NNPC should provide a full accounting of its 2010-2013 oil sales including the buyers, the terms of the sale agreements, the price and where the proceeds went, providing particular detail and justification for funds that bypass the Federation Account. This echoes the recommendation made in the central bank governor's letter.

The Central Bank of Nigeria and the Ministry of Finance should do their part and produce fuller explanations of the revenues that enter the Federation Account, where they came from, and where they go. These actors could also shed light on the remarkably opaque Excess Crude Account., the country's politically controversial oil revenue savings fund. If they lack necessary data from NNPC to provide a full picture, they should say so.

Global action on commodity sales. For many producing countries, oil and gas sales are the largest source of public revenues, and problems in their management are not unique to Nigeria. This week, Global Witness revealed how Azerbaijan's national oil company sells oil through a myriad of shell companies, likely to the benefit of some shadowy elites. In Angola, the national oil company failed to remit $32 billion in oil sale revenue to the treasury, in a case not dissimilar to the one discussed here. However, international efforts to improve governance of oil sales remain limited.

As argued by Revenue Watch in 2012, the responsibility to deliver transparency and due process is shared between the producing government, the companies that buy oil and the governments that host buying companies. As home to many trading companies active in Nigeria and elsewhere, the Swiss government should in particular require reporting on sale transactions with state-owned companies. For Switzerland and other foreign countries engaged in Nigeria, losses in the realm of $50 billion in a desperately poor country should inject urgency into global action on this front.

UPDATE (19 December): In response to the furore over the allegedly missing $50 billion, top government officials stated that NNPC appears to have retained “just” $11 billion in oil revenues meant for the treasury over the 18-month period in question. Eleven billion dollars, while much less than $50 billion, is still a huge sum. The evident confusion surrounding the country’s largest revenue streams, and the continuing failure to address the governance shortcomings identified in this blog post, show that concerns about whether Nigerian citizens receive a fair return from their oil resources are still very valid.

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