NEITI Publishes 2013 Oil & Gas Audit Report

Oil & Gas
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Monday, May 23, 2016 11:48AM/ NEITI

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Introduction

Nigeria is located within Sub – Saharan Africa and has a total land area of 923,768.64 sq. km. It shares borders with the Republic of Benin in the west, Cameroon in the East, Niger and Chad in the north and the Gulf of Guinea to the South.

With a population estimate of about 170 million people, Nigeria is the largest country in Africa and the largest producer and exporter of Crude Oil on the continent. Nigeria also has the largest natural gas reserves in Africa and is among the world’s top five exporters of LNG.

Given these large reserves of human and natural resources, the country has significant potential to build a prosperous economy characterized by rapid economic growth that can significantly reduce poverty and inequality while at the same time improving standards of living of the population through better access to and quality of health care, education and infrastructure services.

Unfortunately, this potential has not been achieved due partly to the over-dependence on Crude Oil and Gas revenue and lack of transparency in the Oil and Gas Sector. The importance of NEITI in the improvement of governance in the Oil and Gas sector for the overall interest of the vast majority of Nigerians can therefore not be overemphasized.

Overview of the Oil and Gas industry

Nigeria is estimated to have a proven oil reserve of 37.2 billion barrels and a proven natural gas reserve of 180 trillion cubic feet (Tcf), which is the World’s 7th largest gas reserve.

Out of the thirty-six constituent states of the federation, nine states (Abia, Akwa Ibom, Bayelsa, Cross Rivers, Delta, Edo, Imo, Ondo and Rivers) situated in the southern part, particularly the Niger Delta region of the Country produce the onshore oil and gas, while the source of the country’s offshore production is from wells in the Bight of Bonny, Bight of Benin and the Gulf of Guinea.

The United States traditionally had been the largest importer of Nigeria’s oil until the last few years, it is worthy to note that in 2011, 33% (767,000 bbl/d) of Nigeria’s crude oil export was sent to the United States, making Nigeria the fourth largest foreign crude oil supplier to the U.S.

However with the recent exploration of Shale Oil by the U.S, India is now the largest importer of Nigeria’s oil, importing 370,000bpd or 18% of total crude exports in 2014.

Nigeria is also heavily dependent on the importation of Petroleum Products, importing about 164,000 bpd of petroleum products in 2013 despite having four refineries with a combined crude oil distillation capacity of 445,000 bpd.

The refineries operate below full capacity because of operational failures, fires, vandalism and sabotage on the crude pipelines conveying domestic crude oil to the refineries. The combined capacity utilisation of the four local refineries was 22% in 2013.

Nigeria operates a regime of subsidy on petroleum products and this has been a contentious political and economic issue. According to Energy Global magazine, fuel subsidies costs was about US$8 billion in 2011, accounting for 30% of the government’s expenditure, approximately 4% of GDP and 118% of the capital budget. Fuel subsidy costs reported in the last NEITI Audit Report was about $8.6 Billion for year 2012.

The production and development of the huge natural gas reserve has been constrained largely due to the lack of infrastructure to monetise natural gas that is currently flared. This is apart from the fact that the natural gas industry is affected by the same security and regulatory challenges that affect the Oil Industry.

Nigeria exports the vast majority of its natural gas in the form of LNG through the partly government owned Nigeria Liquefied Natural Gas (NLNG) company. The 2012 NEITI report gave Cumulative revenue of US$11.6 billion due to Nigerian government from NLNG as unaccounted for.

Legal Frameworks, Legislations and Fiscal Regimes in the Nigerian Oil & Gas Industry

The Constitution of the Federal Republic of Nigeria 1999, section 44(3), vest the ownership and control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria, its territorial waters, and exclusive economic zone on the Federal Government. The Federal Government is to manage such minerals in such manner as may be prescribed by the National Assembly.

Thus the Constitution confers exclusive jurisdiction on the National Assembly on matters relating to oil, gas and other minerals.

The Petroleum industry as it is today is governed through a myriad of Principal and subsidiary pieces of inter related legislations dealing with specific aspect of the operations of the Oil and Gas industry.

There are aspects of the law stipulating ways in which businesses should be formed and organized. There are equally others that explain the industry’s transactions, scope of operation, responsibility to government, consumers and the international community.

Key legislation relating to the sector includes the Petroleum Act Cap P10 LFN 2004 (the Petroleum Act), the Nigerian National Petroleum Corporation Act Cap N123 LFN 2004 (the NNPC Act), the Associated Gas Reinjection Act 2004 and the Associated Gas Re-injection (Amendment Act) 2004 (the Associated Gas Acts), the Petroleum Profits Tax Act Cap P13 LFN 2004 (the PPTA) and the Nigerian Oil & Gas Industry Content Development Act 2010 (the NCDA).

The Federal Ministry of Petroleum Resources has overall regulatory oversight of the Nigerian oil and gas industry. The Ministry acts primarily through the Department of Petroleum Resources(DPR).

Other regulatory bodies include the Petroleum Products Pricing Regulatory Agency(PPPRA), which regulates the rates for the transportation and distribution of petroleum products; the Federal Ministry of Environment, Housing and Urban Development, which is responsible for approving environmental impact assessment reports in respect of oil and gas projects; the Nigerian Content Development and Monitoring Board(NCDMB), which is responsible for ensuring compliance with the Nigerian Content Development Act (NCDA); and the Joint Development Authority(JDA), which is responsible for the supervision of petroleum activities within the Nigeria–São Tomé and Príncipe Joint Development Authority.

The Nigerian National Petroleum Corporation (NNPC)also has regulatory roles that it performs through the Department of Petroleum Resources(DPR).

Industry Reform - The Petroleum Industry Bill (PIB)
In recent years, the country has sought to overhaul the legislative framework relating to the oil and gas industry, restructure the regulatory and commercial institutions in the industry and also change the fiscal dynamics and reform the operational mechanisms of the upstream, downstream and natural gas industries.

This has resulted in the draft of the Petroleum Industry Bill (PIB) presented before the Nigerian parliament or National Assembly in July 2012. The draft contains changes to taxation regimes, improved economies for small, onshore developments, amended royalty structure and the unbundling of the State Owned Enterprise, the NNPC4. The passage of the bill, which is likely to have a significant impact on, the Nigerian oil and gas industry, has met a lot of resistance from the IOCs.

The PIB sets out to establish an omnibus legislation that will set transparent rules for the management of the Oil and Gas Industry.

Highlights of Oil and Gas Contribution to the Economy
The Nigerian Economy is one of the fastest growing economies in Africa. It was ranked 36th in the world (in terms of nominal GDP) in 2012 and 30th in 2013 before rebasing (40th in 2005, 52nd in 2000), in April 2013, which made it the largest economy in Africa. Nigeria is also on track to become one of the 20 largest economies in the world by 2020.

The country recently changed its economic analysis to account for rapidly growing contributors to its GDP, such as telecommunications, banking, and its entertainment industry.

As a result of this statistical revision, Nigeria has added 89% to its GDP, making it the largest African economy. According to a Citigroup report published in February 2011, Nigeria will get the highest average GDP growth in the world between 2010 and 2050. The country is also one of the two countries from Africa listed among 11 Global Growth Generators countries.

The Oil and Gas Sector in Nigeria, employed the least number of employees in the Country in 2013. According to the National Bureau of Statistics Job Creation Survey Report for the 1st, 2nd, 3rd, and 4th quarters of 2013, out of the 10.97 Million employed in 2013, the Oil and Gas Sector accounted for 582 employements, representing 0.01% of the Total number employed in 20135.

Although much has been said about the status of Nigeria as a major exporter of oil,  Nigeria produces only about 2.7% of the world's supply (Saudi Arabia: 12.9%, Russia: 12.7%, USA: 8.6%) and to further put Oil and Gas production in perspective, the sector contributed about 13% to Real GDP in 2013 (this will be lower if the informal sector is considered) compared to Agricultural sector which contributed 38.2%. Therefore, though the petroleum sector is important, it remains in fact a small part of an overall vibrant and diversified economy.





The importance of the petroleum industry to the economic growth of the country can best be appreciated when the Central Bank of Nigeria statistics, which shows that Oil and Gas revenue constituted 69.9% of Gross Federally-collected revenue in 2013, is considered.

Table 2.4B, Figure 2.4B, Table 2.4C and Figure 2.4C below are illustrations of components and contributions to Federation Accounts Revenue.





The main components of Gross Oil Revenue collected into the Federation account are Crude Oil and Gas sales (net of allocation to Joint Venture Cash calls), Petroleum Profit Tax, Royalties (Crude Oil and Gas). Others include Gas flared penalties, Concession Rentals and other taxes other than PPT.





Summary of Exploration and Production Data for 2013 Fiscal Year
The NNPC reported the acquisition of 4,695.67 sq. kms of 3D Seismic data, while 4,396 sq kms was processed/reprocessed. Thirty-Three (33) rigs were in operation and One hundred and Eighty-One (181) wells were drilled. Significant part of the exploration activity was in the North (Chad Basin) and the East (Anambra Basin)7.

The total production of Crude oil for 2013 is 800,488,000 bbl, this is a drop of 7.63% from 866,651,059 bbl recorded in 2012. The breakdown of the production liftings is as shown in Table 2.5 below:





The Ekanga/Zafiro Crude Oil shown in the table above is the total production from the untised field in the Joint Development Zone (JDZ) of Nigeria and São Tomé and Príncipe

Government Participation in the Oil and Gas Sector
The NNPC is the State oil company that represents Government interests in the various production arrangements and contracts in the Oil and Gas Industry. It is a statutory corporation that also play regulatory roles aside from engaging in activities that span through the whole spectrum of the oil and gas value chain, from exploration, to production, refining, transportation, distribution and supply of petroleum products.

NNPC sometimes operates directly in petroleum operations (for example, its participation in upstream petroleum arrangements with international oil companies) and sometimes indirectly through subsidiaries.

One of the more prominent subsidiaries is the Nigerian Petroleum Development Company (“NPDC”), which is engaged in petroleum exploration and production. Another well-known subsidiary is the Pipelines and Product Marketing Company Limited (“PPMC”).

The PPMC is responsible for the transportation of crude oil to the refineries and the transportation of petroleum products to depots located in various parts of Nigeria.

Government has already commenced plans to privatise the PPMC as well as other subsidiaries operating in the downstream petroleum sector.

Another important arm of the NNPC is the National Petroleum Investment Management Services (“NAPIMS”). The NAPIMS is responsible for overseeing the investments of the Federal Government of Nigeria in upstream petroleum operations conducted under joint ventures, production sharing contracts and other petroleum arrangements with the international oil companies (“IOCs”).

In the downstream, NNPC has four refineries in Kaduna, Port Harcourt and Warri that were built between 1978 and 1985 with a total installed capacity of 445,000 bpd and these refineries are linked with a network of pipelines and Depots.

The Nigerian government in 1988 restructured the NNPC into six Directorates namely; Exploration and Production, Refineries and Petrochemicals, Finance and Accounts, Commercial and Investment, Corporate Services, and Gas and Power under a Group Managing Director.

Twelve subsidiaries were also formed namely; Duke Oil, Hyson (Carlson Bermuda), Integrated Data Services Ltd (IDSL), National Engineering & Technical Co. (NETCO), Nigerian Gas Co. (NGC), Nigerian Petroleum Development Co. (NPDC), National Petroleum Investment Management Service (NAPIMS), Warri Refining & Petrochemical Co. (WRPC), Kaduna Refining & Petrochemical Co. ‘(KRPC), and Port Harcourt Refining Co. (PHRC).

There are also indications that the current Nigeria government is on the path of restructuring the NNPC as part of the current investigations and reviews going on in the Oil and Gas Industry.

Overview of Revenue collection from Oil and Gas Industry
The revenue payments from the Oil and Gas Industry are made to various tiers of government and Sub-National entities. Revenues paid to the National Government include the following:

a. Proceeds from sale of Government Crude Oil and Gas.

This refers to the Federal share of Crude Oil from the various production arrangements. It could be in the form of equity share from Joint Ventures (JVs) or Profit Oil from Production Sharing Contracts (PSCs). The proceeds are paid into the revenue account in both local (Domestic crude Oil) and foreign currency (Export crude Oil)

b. Petroleum Profits Tax (PPT)

The Petroleum Profits Tax (PPT) is a tax imposed on the profits from petroleum operations in an accounting period.

c. Royalty (Oil & Gas)

d. Signature Bonuses

e. Licenses and Concession Rental

f. Gas Flared Penalties.

g. Companies Income Tax (CIT)

h. Value Added Tax (VAT)

i. Withholding Tax (WHT)

j. Pay-As-You-Earn (PAYE) of Federal Capital Territory residents.

k. Education Tax (EDT)

The Withholding Tax deductions from individuals and Registered Business Names are payable to the States in accordance with the Personal Income Tax Act.

Other revenue flows to Sub-national entities are:

a. Niger Delta Development Commission (NDDC) Levy

b. Nigerian Content Development and Monitoring Board (NCDMB) payments

c. Nigerian Export Supervision Scheme (NESS) fees

d. Nigerian Maritime Administration and Safety Agency (NIMASA) payments

e. National Inland Waterway Authority (NIWA) payments.

The various revenue flows to the Oil and Gas Industry mentioned above are discussed in Section 8.8.1 of this report.

Overview of Federation Revenue Distribution, Management & Expenditure
The Revenue Allocation Act provides for the Distribution of the federation funds. Section 1 of the Act provides that, “the amount standing to the credit of the Federation Account, less the sum equivalent to 13 per cent of the revenue accruing to the Federation Account directly from any natural resources as a first line charge for distribution to the beneficiaries of the derivation funds in accordance with the Constitution is distributed among the Federal and State Governments and the Local Government Councils in each State of the Federation9.” The current Revenue Allocation Formula and distribution of Federation Account Revenue among the three tiers of Government are as follows:

 


The distribution of revenue from the Oil and Gas Industry and other non-oil and gas sources is illustrated in Figure 2.8A above.

The percentage accruable to each tier of Government (36 states and 774 Local Governments) is shared among the constituents of each tier by applying factors such as Equality, Population, Land Mass, Internally Generated Revenue, Social Development (Health, Education and Water) while the 13% derivation fund deducted as a first line charge is further shared among the Oil producing states based on the derivation principle.

The Federal Government also earmark special budgetary provisions for oil producing states of Abia, Akwa Ibom, Bayelsa, Cross Rivers, Delta, Edo, Imo, Ondo and Rivers States, which are channelled through the Federal Ministry of Niger Delta, and the Amnesty Programme under the Presidency for efficiency and effective impact.

The Niger Delta Development Commission (NDDC) also receives direct payments from oil and gas Industry to cater for the Oil producing states and this is not part of the federation budget

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