State participation

The Nigerian Government participates in the oil and gas industry through the Nigerian National Petroleum Corporation (NNPC). The Nigerian National Petroleum Corporation Act was enacted on the 1st of April 1977. The Act established the NNPC, empowering it … “to engage in all commercial activities relating to the Petroleum industry and to enforce all regulatory measures relating to the general control of the Petroleum sector through its Petroleum Inspectorate department”. It was reorganized in 1988. This led to the transfer of the Petroleum Inspectorate to the Ministry of Petroleum Resources becoming the entity now referred to as the Department of Petroleum Resources (DPR). Part 1 section 6 (1)(d) gives the Corporation “…powers to do anything which in its opinion is calculated to facilitate the carrying out of its duties under this Act including…. establish and maintain subsidiaries for the discharge of such functions as the Corporation may determine”.

In exercise of its powers under the Act, NNPC has established over 20 subsidiaries. These subsidiaries are in the form of joint ventures or wholly-owned companies. See Table below showing subsidiaries of NNPC and its % holdings.

It is also through the NNPC that the Federal Government participates in joint ventures with oil companies, holds concessions in production sharing contracts and manages service contracts. The NNPC holds shares for the government in companies such as the Nigeria LNG Limited and West African Gas Pipeline Company limited (WAPCo).

Table 1.NNPC subsidiaries and % holding

NNPC Subsidiaries

Part I section 1(2) of the Act further provides that the affairs of the corporation shall be conducted by a Board of Directors. Part 1 section 7 (1, 2, 4 and 5) provides that;

  1. The Corporation shall keep proper accounts and proper records in relation thereto in a form which shall conform to the best commercial standards.
  2. The Corporation shall as soon as may be after the end of the financial year to which the accounts relate cause its accounts to be audited by auditors appointed by the Corporation, with the approval of the National Council of Ministers, from the list of auditors and in accordance with the guidelines laid down by the Auditor-General of the Federation.
  3. The Corporation shall maintain a fund which shall consist of-
    (a) such money as may from time to time be provided by the Federal Government for the purposes of this Act by way of grants or loans or otherwise howsoever; and 
    (b) such money as may be received by the Corporation in the course of its operations or in relation to the exercise by the Corporation of any of its functions under this Act, and from such fund there shall be defrayed all expenses incurred by the Corporation.
  4. The Corporation shall submit to the National Council of Ministers no later than three months before the end of each financial year estimates of its expenditure and income relating to the next following financial year.

Section 7 (4) appears to give the Corporation broad authorisation as far as its treatment of expenses incurred in the course of its operations is concerned, but when read along with section 7 (5), it means that NNPC will be required to submit in advance, an estimation of what those retained earnings may be. It is also required through Section 7(1), to cause for an audit of its account for a given financial year at the end of that year according to guidelines laid down by the Auditor-General of the federation. Part IV Section 19 further requires that the Corporation shall submit to the National Council of Ministers, a report on the activities of the Corporation including a copy of the audited accounts for the financial year and the auditor’s report thereon.

Section 8. (1) Subject to the other provisions of this section, the Corporation may from
time to time borrow by overdraft or otherwise howsoever such sums as it may
require in the exercise of its functions under this Act.

Part IV19. The Corporation shall prepare and submit to the National Council of Ministers, through the Minister not later than 30th June in each financial year, a report on the activities of the Corporation during the immediately preceding financial year, and shall include in such report a copy of the audited accounts of the Corporation for that year and the auditors' report thereon.

Section 9. The President may issue to the Corporation such direction as it may think necessary as to the disposal of any surplus funds of the Corporation, and subject to any such directions, the Corporation may invest its funds and maintain a general reserve.

The Nigerian National Petroleum Corporation (Projects) Act of 1993 also empowers the Corporation to borrow money in any currency for the purposes of executing an approved project.

Funding NNPC and its subsidiaries

In practice, the Corporation submits to the National Assembly, ahead of a fiscal year, its strategy and budget including projected revenue for the period. The budget proposal shows aggregate requirements for capital and operating costs for all its directorates (including subsidiaries). The Petroleum Revenue Special Task Force (PRSTF) Report of 2012 describes its participation in the appropriation process as ‘limited’, this is because it does not receive any funds (from the federal government) to grow its assets or meet its operating costs. The joint venture cash call budget is approved along with the annual federal budget of the federal government.

The Corporation (from information gathered from its monthly financial and operations report, and interviews conducted), relies on revenue from its subsidiaries and business units, deductions from oil revenue due to the federation and third-party financing to fund its operations and approved projects. The cash call budget approved along with the federal annual budget is also not funded directly by the federal government. Deductions are made from revenues from crude oil and gas sales in the year to fund cash call activities.

Wholly owned NNPC subsidiaries are limited liability companies registered with the Corporate Affairs Commission (CAC), they are fully funded by the Corporation. The subsidiaries that are joint ventures with other parties are funded by NNPC according to its equity holding. Records from NNPC monthly performance reports show the Corporation ended the 2017 financial year with an operating loss of N82 Billion.

Flow of oil and gas revenue to the federation account

NNPC’s participation in the Industry gives rise to substantial revenues to the Nigerian government. Sources of federation revenue from the industry include;

a) Sale of government equity share of crude oil (export and domestic) lifted by the NNPC
b) LPG gas exports and NLNG feedstock
c) Domestic gas sales

Other revenue sources to the federation lifted by the NNPC include;
d) Royalty on petroleum operations through DPR
e) Taxes on petroleum operations through FIRS

In practice, the flow of government revenue from oil and gas is shown in the figure below:

 

Figure 2: Flow of oil and gas revenue into the federation account.

figu1
Source: NNPC presentation to NEITI, August 2017

NNPC lifts government equity crude from joint venture operations and balance of government equity from alternative funding and modified carry arrangements (after lifting of IOC shared oil and carry oil). It also lifts crude for royalty, tax and profit oil from production sharing contracts and royalty, tax and remuneration oil from service contracts.

A portion of government equity crude is allocated daily as domestic crude. This is the 445 mbbls/day allocated to the Petroleum Products Marketing Company for domestic use (162,425 mbbls/year), the rest is categorized as export crude. A portion of export crude is allocated to 3rd Party Finance Liftings. Export crude proceeds are paid into the CBN/NNPC JP Morgan Chase USD Crude Oil Account; from this account, payments are made to CBN/NNPC JVCC Account to fund cash calls and the federation account. Other liftings are made by NNPC in respect of royalty oil on the account of DPR and tax oil on the account of FIRS. Proceeds are paid into CBN/DPR JP Morgan Crude Oil Account and CBN/FIRS JP Morgan Crude Oil Account respectively.

Crude supplied to local refineries, crude allocated for offshore processing, crude utilized for Direct Sales Direct Purchase and crude exported make up domestic crude allocation. The proceeds from domestic allocation were remitted into the federation account after adjusting for under-recoveries, pipeline management and losses.

The Report has not established a deviation from statutory requirements in financial relations with the Federation by the NNPC. In fulfillment of Part 1 Section 7(2) of the NNPC Act, as at the time of concluding the NEITI 2017 Oil & Gas Industry Report, the Corporation completed an independent audit of its accounts for 2016 and 2017. However, it notes that the accounts were not publicly available even though there was a firm commitment by the management of the Corporation to make them publicly available.

The Report has also highlighted the loans collected for the Satellite Field Development Project, the Natural Gas to Liquids II and Reserve Development Project under the NNPC - Mobil Joint Venture, Projects Cheetah and Falcon under the NNPC – Chevron Joint Venture, Santolina 1 & 2 under the NNPC - SPDC Joint Venture and the PXF 1 & 2. For more on the status of repayment of the loans, see section 3.4 of the 2017 NEITI Oil & Gas Report. The report did not establish any other loans or loan guarantees extended by the federal government to companies operating in the sector. The NSWG did not note any changes in state participation in the sector in 2017.