From Crude Oil to Revenue

During the fuel subsidy removal protest of January 2012, amazing and conflicting revenue figures were pulled out from the records of various agencies which at some point became too intriguing for the average Nigerian to make sense of.  There was a general consensus though that something was not right and everyone quickly jumped on the corruption wagon and called foul play in the corridors of power. This all led to the House of Representatives Committee on Fuel Subsidy payment and the controversies that followed.

One thing was crystal clear during the debates that trailed the whole subsidy removal “wahala” – We had no idea what Nigeria actually makes from the sale of crude oil on a daily basis. Agreed the system riddled with corruption, lets shift the focus to a good starting point. At the very least, lets begin to understand the crude oil value chain and how the country obtains revenue from it. 

What is the Crude Oil Value Chain? 

The crude oil value chain is generally divided into three - upstream activities, where exploration and production happens, the midstream, which deals with processing and transportation, and the downstream where refining and marketing of petroleum products occurs.

 

The players in the upstream sector are mostly foreign oil companies with few indigenous ones. The oil companies produce the crude oil and fill up the barrels to be transported either as export crude on to sea vessels, or domestic crude to be transported through pipelines to the local refineries within Nigeria. Export crude is marketed and sold to various countries that buy Nigerian crude oil. The crude oil that is for domestic use is refined and sold as petroleum products within and outside the country by oil marketers. The NNPC as the national oil company is a major player and regulator in the whole industry value chain.  

The bulk of the crude oil produced is allocated according to the agreements between the NNPC on behalf of the Nigerian government and the oil companies. In most cases the standard operating system is for the NNPC to hold 60% within any of these arrangements. The shares of crude oil are termed government equity oil under Joint Venture Agreement, royalty, tax and profit oil under Production Sharing Contracts. The Nigerian share of the crude oil is then divided into domestic and export crude. 

As Nigerians would say- "So where the money"? 

When domestic crude is sold, the money goes into CBN/NNPC Naira Account. Then deductions are made for subsidy payments and the rest goes into the federation account. When export crude is sold, the money goes into the CBN/NNPC JP Morgan Chase Dollar Account. Deductions are also made for what is called the JV cash calls before the remainder goes to the Federation Account.  The CBN maintains the accounts on behalf of the Federation. The Auditor General of the Federation serves as the country’s accountant and manager of the account with the CBN. 

How is the money shared?

In simplistic terms the pool of oil money in the Federation Account is further split to remove 13% oil derivation which the oil producing states get, before the remaining 87% is shared between the Federal Government, the 36 States and the 774 Local Government Areas. The infographic below captures this description

So how much Nigeria gets seemingly depends on how much crude oil is produced?

Yes and No.

The yes argument implies taking the simple calculation of multiplying our daily production, with the daily spot price to determine what revenue is. Whereas the other side of the coin is; multiply our daily output, by the daily spot price, then minus all the deductions. This may provide a clearer picture of what the actual revenue is. However, different agencies, report different figures as highlighted in NEITI Reports.

So for example if we assume the production figure is 2.5million barrels per day according to OPEC production quota, the country owns only 60% of that figure. Out of that figure, an estimated 500,000 barrels per day, supposedly goes to local refineries, refined into by-products (PMS, AGO, DPK etc.), to satisfy local demand.

Oil Producing States

On the Atlantic coast of Nigeria where the Niger River divides into numerous tributaries and along the coast from Benin River on the west to the Imo River on the east lies the oil rich Niger Delta.

Home to some 30 million people from the Ijaws, Edos, Urhobos, Itsekiris, Yorubas, Igbos, Efiks and Kalabaris, the Niger delta occupies a land mass area that makes up 7.5% of the country. The traditional oil producing Niger delta states are Edo, Delta, Bayelsa, Rivers, Akwa-Ibom and Cross Rivers. Abia, Ondo, Imo were later additions. Anambra State was recently added in 2012 by the president to make up the ten oil-producing states. 

The 80-20 States

Akwa-Ibom is the highest oil producing state with eight local government areas in the state hosting production. Apart from crude oil, Akwa-Ibom has several natural mineral resources such as clay, limestone, salt, coal, natural gas, giver nitrate and glass sand.

Rivers state is famous for its oil production, with vast reserves of crude oil and natural gas. It is also the chief oil-refining city in the country with two refineries in Port Harcourt. For several years Rivers State produced more oil than all the other states before being displaced from its position by Akwa-Ibom. The main occupation of its people is farming and fishing, with the state government currently running a robust agricultural policy, aimed at improving food production.

Delta state ranks third to rivers and produces a major fraction of Nigeria’s crude oil. The nation’s second refinery as well as petrochemical plant is located in the state, at Warri. The people of the state are mostly farmers, with agricultural produce as; yam, fish crab, cocoa yam, rubber.

Bayelsa state is home to Oloibiri in Ogbia local government were crude oil was first discovered in commercial quantities back in 1956. The first oil well was active for 20 years before it was shut down. The major occupation of Bayelsa people are fishing and farming.

Nigeria’s crude oil types were named after the regions that produce them- Bonny Light is named after the prolific city of Bonny in Rivers state, home to the liquefied natural gas (LNG) on Bonny Island. Qua Iboe is from Akwa Ibom, Brass comes from Bayelsa, Forcados and Escravos from Delta. 

Revenue Contributions, Derivations and Community Funds

There is a derivation principle governing the allocation of revenue to oil producing states. The 13% derivation was enshrined in the 1999 constitution, and came into effect in year 2000.

After the sale of Nigeria’s crude oil, 13% is removed from the gross oil revenue exclusively for oil producing states. To understand how oil revenue is shared – click here. Each oil producing state gets a share out of 13% revenue, calculated based on the production of oil from the individual states. For instance, Akwa-Ibom earns the largest revenue from derivation royalties because it is the highest oil producer out of the oil producing states. These sums are paid into the state accounts.

If the presently debated Petroleum Industry Bill is passed into law, with the Host Community Fund allocation, communities described “petroleum producing areas” are set get a new 10% funding for socio-economic and infrastructure development. 

Dearth in the Midst of Plenty

In human development terms, the delta fares somewhat better - poverty rates according to the NBS are said to be lower by half, compared to the rest of Nigeria. Contrary to these findings, over 75% of the people of the delta rate themselves as poor (Sayne, Gillies).

Despite the oil riches of the delta region, the glaring paradox is that it remains grossly underdeveloped in terms of formal economy, infrastructure and public services. Militancy is just one of the symptoms of the deeply rooted problems in the delta regions. Environmental damage brought about by decades of exploitation; continuous gas flaring, oil spills, illegal refining, oil theft and lenient laws continue to worsen the situation. Multinational oil companies have contributed in part to these hazards. These companies have had to pay compensations to calm volatile reactions from communities and/or penalties albeit at lower rates than international standards. 

The agitations of different stakeholders in the Niger Delta have posed a number of pertinent questions around good governance and benefit capture for the oil producing communities. For instance, some communities have claimed that in the past 13 years, their governors have misappropriated over N7.282 trillion received as derivation funds, calling on NEITI and other agencies to intervene in this matter.

Over the years, the Nigerian government has increased financial allocations to the area and established all sorts of agencies to oversee socio-economic development within the Niger Delta.  Some of the agencies have included the likes of OMPADEC (1996) now defunct, NDDC (2000) and Ministry of Niger Delta Affairs (2008) South-South State Governors from oil producing states have also jointly ventured into establishing an organisation- the BRACED Commission to promote regional, economic co-operation and integration. To what extent though have these agencies and financial allocations addressed the problems of the delta? What value creation have they accomplished? What can be done to strengthen good governance and transparency around natural resources countrywide?

Discrepancy in Figures

The one thing that is very clear about Nigeria’s oil industry figures is that they don’t just add up.  Take production volumes for instance. NNPC production figures from 1997 to 2011 differ from BP Statistical Review, EIA and OPEC figures.  OPEC figures differ by an average of 11% while the closest figures to that of the NNPC are EIA figures (4% disparity), and BP Statistical Review figures (3% disparity). 

These disparity trends are also present in crude oil exports data, petroleum products imports and consumption data, and indeed sales of crude oil and gas data.

Core oil and gas financial flows to the federation have been audited within the country by NEITI since 1999. These reports have provided a view into the data sets that were previously shrouded in secrecy. The known financial remittances to the Federation Account from the oil and gas industry comprise of

• Sales of equity crude oil and gas,
• Payments- signature bonuses, concession rentals, gas flaring penalties,
• Oil and gas royalty payments, 
• Others- Withholding Tax, PAYE, dividends & repayments of loans by NLNG, contributions to NDDC and Education Tax
• Taxes- Petroleum Profits Tax, Companies Income Tax, Value Added Tax

The NEITI audit of 2009-2011, revealed some interesting information. At average oil prices of $112 per barrel, total revenue paid to the Federation and other entities was $143.5billion.

 

 Apparently there is a difference between the derived average conversion rate used by NNPC and the annual average rate used by CBN for sales of domestic crude. This difference has resulted in a loss of N98.3billion. Another highlight is that the sum of $4.84billion received from NLNG as dividends and loan repayments by NNPC have not been remitted to the Federation Account.

It is a fact that we can’t control what we don’t measure. A country that is over ninety percent dependent on crude oil revenues to run its economy should equally prioritize the importance of how it measures and controls this resource and the revenues gotten from it.

According to NEITI, the industry has no consistent practice regarding the point at which production is measured. The lack of automation of the accounting system for equity crude, creates difficulties for reconciliation and fund interface. 

In the midst of these discrepancies, the quest for transparency and good governance continues to push for change in the way this elusive industry manages Nigeria’s oil resources. 

Off-OPEC vs OPEC

This article speaks to the situation in Nigeria not about other OPEC nations.

This article comes in the form of an interview with a friend of mine that is a Joint Venture Operator. Those are the companies that load vessels, this one specifically at the Bonny Terminal.

First a little preliminary information:

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of twelve oil-producing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

According to its statutes, one of the principal goals is the determination of the best means for safeguarding the organization’s interests, individually and collectively. It also pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry.

OPEC transactions are transactions by the Nigerian government on behalf of the 65 appointed/approved companies by the Federal Government of Nigeria.

The approval is from the NNPC Abuja and signed by the Minister of Petroleum.

Off-OPEC is transacted at the Bonny Terminal on behalf of the government and is legal in Nigeria. Doing so breaks OPEC rules, hence we have Off-OPEC police that monitors/sanction countries that do Off-OPEC sales. As Off-OPEC prices are governed by supply and demand they are seen to be increasing the volume of oil available worldwide thereby dropping the price fixed by OPEC.

Every country in OPEC does Off-OPEC sales, but they all do it underground through various companies (Fiduciary companies) which cannot be traced to the government, hence in Nigeria it is done at Bonny terminal NOT in the NNPC towers in Abuja.

JS: Who decides whether a transaction is going to be OPEC or off-OPEC?

JVO; Government, as all oil belongs to government.

JS; when that decision is made then the product is made available either through the Bulk Equity Account or to an allotment holder?

JVO; Every allocation or allotment outside of the 65 companies I mentioned above are Off-OPEC! Either Bulk Equity or Allotment to holder, they are all Off-OPEC.

JS; Just a little clarification here, Allotment holders receive an allotment, which is a fixed amount of oil they can sell on a quarterly basis. They receive an authority to sell (ATS) letter that defines how much oil they have to sell. When they sell that allotment they may not be able to extend the allotment to handle additional sales they have made to refineries that they have a relationship with. Their authority ends there.

NNPC approved Fiduciaries are always selling out of the Bulk Equity Account and even though they also can get an ATS it is somewhat expandable. This is because Fiduciaries are actually given authority to negotiate on behalf of the NNPC. If you have a qualified buyer you might as well sell him oil. I know this is the case because we are presently negotiating with an Allotment holder to buy oil through one of our Fiduciaries. Their allotment ran out and now they have to buy from someone that has the authority to sell but whose allotment will not run out – so to speak.

JS; Do NNPC Approved Fiduciaries (NAF) always have joint allocations that they can all sell or do they occasionally get an allocation that is solely for that NAF to sell?

JVO; NAF don’t always have joint allocations but depending on situations they can have it as the one you have seen, it depends on the transaction at hand.

JS; Is the Bulk Equity Account always there to be tapped by NAFs with a phone call and a banking instrument?

JVO; NAF don’t actually have limit on what they can sell, they can sell as much as the demand from buyers once there is a banking instrument.

JS; what is the distinction between a NNPC Approved Fiduciary and an allotment holder?

JVO; the difference is just in name, as they are all Off-OPEC!

JS; Can an Allocation Holder sell out of the Bulk Equity Account or do they need to go through a NNPC Approved Fiduciary?

JVO; they are all Off-OPEC and can sell anything.

As a clarification, the allotment holder that we are dealing with is a brokerage house so they are actually a buyer that is reselling to the Refinery. My guess is that they used their allotment to establish a relationship and then the refinery had a greater demand so they have to dip into the Bulk Equity Account as a buyer in order to meet the refinery’s increased demand.

Once they get all the documentation they have requested this will likely be an easy sale. It is nice working with pros that know how to get the job done.

Petroleum Industry Bill At A Glance

The Petroleum Industry Bill (PIB) has been thrown around recently in political discourse like a hot potato - everybody has something to say about it but no one wants to claim it in its entirety. Newspapers keep churning out numerous articles about the PIB and the variety of impacts it will have once passed into law. Opinions and official statements have also been brandished arguing for or against its passage, each one outlining their justifications and in some cases, referencing bogus facts to support their position. In truth, discussions about “important” issues that carry along far-reaching consequences are good things to bring to the general public discussion table at least for democracy sakes. The first key question is therefore

What is the PIB?

The PIB refers to the Petroleum Industry Bill. It is an omnibus legislation, which seeks to regulate all the activities in the oil and gas industry in Nigeria.  It is the outcome of the Oil and Gas Sector Reform Implementation committee, which was tasked to produce a comprehensive legislation for the present day Nigerian oil and gas industry in 2000. After numerous drafts, and redrafts by the House of Representatives the latest 223 page PIB has undergone the second reading on 7 March 2013. It is now in the hands of the committees who have a six-week timeline to report back to the Senate.

The PIB aims to, improve the upstream activities of exploration and production. Incidentally the petroleum industry has strong links to the power sector because Nigeria is still heavily reliant on oil and gas for electricity generation. This is why the PIB also aims to increase domestic supply of gas to the power sector. The PIB aims to also increase transparency and create a conducive business environment for investors. Furthermore the PIB will deregulate and restructure the downstream sector to allow for commercially oriented activities to flourish. These measures will improve upon the existing fiscal regime- that is the taxes, levies and other payments due to the state in order to boost government revenues. 

How Does the PIB Intend to Achieve These?

If passed into law, the PIB repeals all the existing laws in the industry; mainly the Petroleum Act of 1969 (as amended) which is a forty-year-old document, definitely out of synch with the present day industry. 

How Can You Contribute to the PIB?

Recently, according to an article published in Daily Trust (Wednesday 10 April 2013), public hearings have been scheduled for the 22 and 23 April 2013. The chairman of the committee on PIB relayed that public hearings will be hosted in Lagos, Port-Harcourt, Enugu, Kaduna, Illorin and Gombe according to the six geo-political zones. You can have your say as citizens and stakeholders by participating and contributing to the discussions through the public hearings. As the chairman says “we (house of representatives members) cannot sit in our offices and decide for over 150 million Nigerians”.

Some Nagging Issues

It is true that the bill outlines a number of changes, processes and objectives, however it is still riddled with vagueness.

Some argue that the numerous organizations which shall emerge should the PIB be passed, will become duplications of existing ones. On the other hand, another argument is that the current state is no better because of the very slow bureaucratic environment and numerous hurdles, which results in the inability of the government to keep track of the workings of its national oil company, the NNPC, bog down the sector. Therefore, decongesting and unbundling the NNPC into smaller more manageable units under the control of the Minister will make it easier to keep track of the circus shows. Also, almost every new institution has a special paragraph specifying the power to accept gifts, which candidly spells out a new and improved form of “petronage”-our word for corruption in the petroleum industry.

Take for instance in Part II addressing new governance structure, about creating a Petroleum Technical Bureau (PTB) whose function is to advise the Minister of Petroleum Resources on policies regarding the industry. However, there is room for bias and lack of transparency here as the Minister is still the official who appoints said professionals to the bureau and at the Minister’s discretion. This is one instance where the PIB has been criticized for vesting too much power in the Minister for Petroleum Resources.

In terms of control and oversight of licensing procedures, the Minister awards, revokes and renews licences, he/she can arbitrarily decide who gets what without requiring justification; same with the President. This will result, as some claim, in the undermining of the workings of the sector and leaving it too exposed to political manipulations.

Now consider one of the most contentious parts of the PIB: the 10% PHCF or Host Community Fund, a new fund providing socio-economic and infrastructural development of communities within the petroleum producing areas. It is to be sourced from net profits of every upstream producing company. This actually falls at the doorstep of the international oil companies who are the majority upstream players, in addition to all the other taxes and royalties they currently pay. The PIB does not really go to great lengths to define what exactly constitutes a Host Community? Is a community a “host community” if they have an oil well, or in the Nigerian setting where small settlements and neighbourhoods make up a community-which settlement is then a “host community”? This host community matter may just be creating new conflict zones. Moreover who administers the funds – another agency like the NDDC, the state governments that already get 13% derivation, or the oil companies in the communities?

Oil Industry Infrastructure

Substantial investments in oil industry infrastructure began with the discovery of oil in commercial quantities. Following decades of exploration by Shell D‘Arcy and its discovery of commercial quantities of oil, there was suddenly a change in dynamics-

The first export terminal was commissioned at Bonny in 1961. Several other terminals followed, presently there are six export terminals; Forcados and Bonny terminals owned and operated by Shell. Oloibiri and Escravos owned and operated by Chevron, Qua Iboe owned and operated by ExxonMobil and Brass terminal owned and operated by Agip.

Alongside these export terminals there are several Floating Production Storage and Offloading (FPSO) installed in Nigeria. So far, about ten FPSO’s have come on-stream

Antan – Addax (Offshore) – Knock Taggart Vessel,

Ima – Amni (Offshore) – Ailsa Craig Vessel,

Ukpokiti – Express/Conoco (Offshore) – Independence/Spirit Vessels,

Yoho – Mobil (Offshore) – Falcon Vessel,

Abo – NAE (Offshore) – Gray Warrior Vessel,

Okono – NPDC/AENR (Offshore) – Mystras Vessel,

Ea – Shell (Offshore) – Sea Eagle Vessel,

Odudu – Total/Elf (Offshore) – Unity Vessel,

Bonga FPSO (Offshore) –SNEPCO (Shell 55%), ExxonMobil (20%), Eni (12.5%), and Total    (12.5%), operates the Bonga field with NNPC as license holder,

Agbami-Chevron/Famfa/Statoil/Petrobras- Agbami FPSO

Approximately 1650 km of crude oil pipelines transport crude oil within the country.  

This is about 16X the length of Lagos-Ibadan Expressway 

Nigeria has a total of four refineries, with a combined refining capacity of 445,000 barrels per day (bpd).

The first and the oldest refinery is located in Port Harcourt (Rivers State) and was commissioned in 1965. It had an initial capacity of 35,000bpd, but was later expanded to 60,000bpd of light crude. Port Harcourt is also home to a second refinery, which has the capacity to refine 150,000bpd.

The third refinery in Nigeria was commissioned in Warri (Delta State) in 1978, with an initial capacity of 100,000bpd, but was expanded in 1986 to 125,000bpd of light crude.

The fourth and largest inland refinery in the country is located in Kaduna (Kaduna State). It was commissioned in 1980, with an initial capacity of 100,000bpd and later upgraded in 1986 to 110,000bpd.

The Kaduna refinery is supplied by 600km of oil pipelines from the Niger Delta oil fields. The refinery was installed to refine heavy crude and therefore is used to refine mostly imported crude since Nigeria’s crude type is lighter.

Of the total domestic crude oil allocated for local refining, only about 20% is refined for domestic consumption. Although some of the crude is resold as swap oil, the revenues and records from these swaps remains hard to account for.

When crude oil goes through the refining process, about forty-two products are gotten from it. Some of these petroleum products are Premium Motor Spirit (PMS) or Petrol, Automotive Gas Oil or Diesel, Dual Purpose Kerosene (DPK) or Kerosene.

Petroleum products are largely imported by independent oil marketers, stored in tank farms and transported through tankers around the country to be sold to consumers.

This is a brief analysis of the country’s crude oil infrastructure, for further details 

Assessment of the global economy

When the global growth forecast for 2013 was published in July last year at 3.2%, the estimate seemed rather conservative. However, almost a year later, the forecast remains unchanged, although with risks currently skewed to the downside. The on-going challenges to the global economy have also been highlighted in the IMF’s most recent World Economic Outlook, which has reduced its forecast for 2013 to 3.3%, from a 4.1% forecast a year ago.

While at the beginning of the year it looked as if further momentum was building up, the continued decline in the Euro-zone, the significant deceleration in the first quarter in some of the Asian economies and the recently acknowledged slow-down in Russia all have the potential to again push growth down slightly further. This recent deceleration has also become obvious in the continued slowdown in global industrial output, which began in May 2010 and has been mainly due to lower growth in the industrialized economies (Graph 1).

Some regions, however, could provide upside-potential. This would mainly come from the US, where the most recent progress in the labour market has provided some indications of Economic improvement. At the same time, uncertainty prevails given the emerging impact of the sequester cuts and on-going budget negotiations. If challenges can be successfully overcome, then this could lift US growth beyond the current forecast of 1.8%.

In the Euro-zone, a meeting of the European Council at the end of May is expected to discuss easing some austerity measures. This might reduce the 0.5% economic contraction expected for this year. In Japan, it is still too early to tell if the recently announced monetary stimulus will be accompanied by additional fiscal measures to further lift the current growth forecast of 1.1%.

In the major emerging economies, some further stimulus measures might provide upside support. However, given rising inflation levels, central banks and policymakers alike will be careful in pursuing such a policy. China is likely to consider the 1Q13 growth level of 7.7% as reasonable, as it is higher than their official forecast for the year of 7.5%, although below the MOMR forecast of 8.0%. India has continued lowering its key policy rate in April in order to provide some momentum to its economy, which is forecast to grow at around 6.0%.

However, elsewhere, the most recent data indicates a more severe slow-down in 1Q13 in many of the Asian economies and the latest PMIs for April point to a continued deceleration (Graph 2). Given the unbalanced growth levels, various economic challenges, and the significant impact of the unprecedented increase in monetary supply, the global economy has become more complex in the recent years.

Monetary policies in particular have had an effect on foreign exchange levels, foreign investments and rising asset markets, however, the full consequences are not yet clear.

Although world GDP growth has remained unchanged from the initial forecast, substantial revisions have been made to the economies of some regions since then. Consequently, regional oil demand growth projections have been revised, with upward revisions in Emerging and Developing Countries and sharp downward changes in the OECD economies, mostly in Europe and Asia Pacific. At the same time, total world oil demand growth in 2013 has remained broadly unchanged over the forecasting period at 0.8 mb/d.

However, there are a number of downward risks to the forecast for the remainder of the year. Given the prevailing economic situation and resulting downward risks to global oil demand growth, along with the potentially significant increase in non-OPEC supply, oil market developments warrant close monitoring over the coming months.