39 hard nuts for Lamorde to crack on subsidy probe

• Production/Commercial Allowable volumes have been observed to consistently exceed OPEC quota of 1,673,000 BBL/D for the six month period (April to September 2010).   • Technical Allowable (TA) is defined by DPR to preserve the country oil/gas reserves. Thus, monthly production estimates should not exceed TA. However, instances have been observed where technical allowable […]

• Production/Commercial Allowable volumes have been observed to consistently exceed OPEC quota of 1,673,000 BBL/D for the six month period (April to September 2010).

 

• Technical Allowable (TA) is defined by DPR to preserve the country oil/gas reserves. Thus, monthly production estimates should not exceed TA. However, instances have been observed where technical allowable was exceeded:

– Total and Chevron JVs – April 2010

– NAE and Esso (ERHA) PSCs – May 2010

• Poor data management

– No centralized location for storing electronic copies of historical production and allocation data. These information are stored on personnel (individual) workstations.

• Review of Official Selling Price (OSP) computation by GED C&I in addition to review by GED E&P. This appears to be a legacy issue as GED C&I was formerly the GGM of COMD.

• Currently, determination of Official Selling Price (OSP) is performed by using different variables (dated brent – DB, differentials – D and premium – P) i.e. OSP= DTB+D+P. A model was developed but is currently not being utilized based on its lack of robustness.

• We observed variances in crude sales price especially with regards to domestic sales to PPMC. Crude sales to NNPC were at lower prices (lower than approved OSP) than to other off-takers which is not in compliance with Government’s directive.

– It appears that there is no formal documentation to support this decision/ practice.

• NNPC is invoiced in US$ for domestic crude allocations but is expected to remit the equivalent Naira value to the Federation Account. However we observed that exchange rates used by NNPC were lower than the average exchange rates published by the CBN during the review period.

– Exchange rate variances for 2007, 2008 and 2009 were estimated at N25.7 bn, N33.8 bn and N26.7 bn respectively. (Using CBN rates for the month of transaction)

– NNPC claimed they obtained the exchange rates from CBN via phone but there was no document to substantiate the claim.

• The practice of renewing crude sales contracts on an annual basis is not in line with leading practices.

• Evaluation criteria for renewal of contracts are not clearly stated in the contract document:

– Renewal of contract was said to be based on performance of off-takers. However, the basis and process for determining performance is not clearly defined.

– In 2009, when there was a need to reduce the number of off-takers from 28 to 21 due to supply constraints, the basis for shortlisting the offtakers appears to be based on discretion as we were not provided with any documentation to support the selection process.

• We observed some instances where crude oil was allocated to off-takers who were not on the approved list:

– Ovlas Trading (2,852,316 barrels and 906,269 barrels in 2007 and 2008 respectively)

– Petrojam (2,818,914 barrels in 2007)

– Oil Fields (950,166 barrels in 2007)

– Zenon (906,000 barrels in 2008)

• NNPC and JV operators do not perform reconciliation for gas/ feedstock sold to NLNG.

• Late processing of marketing clearance to load vessels due to delays in the receipt of Letters of Credit (LCs) from Off-takers.

– Delayed receipt of LCs was attributed to both Off-takers and NNPC.

• Long cycle time for billing of off-takers due to delays in receipt of relevant documentation from zonal office. However, off-takers are expected to remit payment irrespective of receipt of bill.

• Non compliance with guidelines relating to defined margin of error on LC value (+/-5%):

– Variance between the invoice value and LC value exceeds the defined 5% error margin. Examples include invoice number COS/02/PPMC/026/08 (Difference of 10.8% i.e. Cargo valuation and LC value are $95,396,587 and $85,000,000 respectively).

• We observed that crude oil sales and collections are not promptly captured on the accounting system. Typically, these transactions are captured in the accounting system after the transaction have been approved at FAAC meeting which is typically two (2) months in arrears.

• From our review of the cycle time for the remittance of domestic crude cost into the Federation Account, sweeping of funds took an average of 110 – 120 days as against the 90 day credit line offered to NNPC.

• The process of selecting Suppliers for importation of products is documented but the documented procedures are not adhered to. We observed that the Evaluation Committee only recommends prices for the importation of petroleum products while actual allocation of importation contracts (especially volumes) appear to be at Management’s discretion.

• Evaluation of quotes/ bids from suppliers appears to be a redundant process because agreed product import prices are based on projected in-house estimate irrespective of prices quoted by suppliers.

• Non compliance with approved policies/ procedures. We observed that contracts for the importation of petroleum products were awarded to companies/ suppliers not listed in the approved prequalification list used for the fourth quarter 2008 importation tender.

– Astana Oil Corporation Limited

– Natural Energy

– Oando

• Delays in discharge of product results in significant demurrage payments.

– Based on our analysis of product importation profiles between January 2008 and June 2010, average demurrage days were estimated at 31 days.

• Late payment to Suppliers of imported petroleum products:

– The importation contract stipulates the settlement of supplier’s invoice 45 days after submission of Notice of Readiness (NOR) to NNPC. However, actual payment to Suppliers ranges between 220 and 240 days after the receipt of NOR.

– The late payment was attributed to cash flow issues as a result of the Corporation’s inability to recover costs incurred on product importation.

• Low capacity utilization of the refineries:

– Capacity utilization for the four refineries in 2008 and 2009 are estimated at 25.3% and 11.2% respectively.

– The low capacity utilisation was attributed to partial/ complete shutdown of processing plants at the refineries as well as pipeline vandalism.

• Non-integration of inventory, procurement and accounting systems:

– Currently, crude oil receipt as well as the production, verification and evacuation of refined petroleum products are managed on MS Excel.

• The processing fee currently earned by the refineries for processing crude oil into petroleum products is not sufficient to meet the total operating cost of the refineries.

– Our analysis of the financials of WRPC and KRPC between 2006 and 2008 revealed that the revenue earned from processing fee was significantly lower than the operating costs resulting in losses for the two refineries during the review period.

– We also observed that the processing fee is determined by a committee constituted by the GED, Finance and Accounts and the last review was carried out in 2005. However, the basis for determining the processing fee rates does not appear to be in line with current realities.

• We observed that NNPC’s subsidy claims and PPPRA’s verification are based on volume of petroleum products available for sale (volume of products imported and actual production from the refineries) as against duly verified volume of products lifted out of the depots (volume of petroleum products sold) as stipulated in the subsidy guidelines.

• Subsidy claims should be remitted to NNPC from PSF by the Federal Ministry of Finance (FMF) based on claims approved by PPPRA. However, NNPC’s practice is to remit to the Federation Account, amount payable for domestic crude less subsidy claims. It then requests the FMF to pay the subsidy amount due to it (from PSF) into the Federation Account being the balance of the cost of domestic crude.

• There are instances of delays in receipt of subsidy advice from PPPRA resulting in the estimation of subsidy claims by NNPC which results in over/ under-deduction from proceeds of domestic crude sales.

– For example, N25bn was deducted as subsidy estimate for September 2009 from domestic crude sales proceeds while PPPRA approved a subsidy of N23.8bn.

– N35bn was also deducted as subsidy estimate for November 2009 but PPPRA approved a subsidy of N21.3bn.

– Over-deduction for these two months amounted to N14.9bn. However, only N4.2bn was swept into the Federation Account by NNPC as adjustment for subsidy claimable in the two months.

• Sub optimal utilisation of depot storage facilities.

– DPK tanks (storage capacity of 18,000 cubic meters) at the various PPMC Depots within System 2B (Mosimi Area) have not been utilised for the past three years as DPK has not been supplied through this system. However, the tanks are said to be in good condition.

• Product losses due to incessant pipeline vandalism continue to hinder the transportation of petroleum products.

– Petroleum products losses through pipeline vandalism stood at 110.38 metric tones in 2009 and the monetary value was estimated at N8.1 bn.

• Lack of an integrated inventory management system to capture and monitor inventory across all depot locations.

– Data on product transfer, reception and discharge across the various depot/ jetties are captured on MS Excel.

• We observed discrepancies in the volume of petroleum product import receipt at Atlas Cove Jetty in June 2010. While MTD reported a volume of 193,160 MT, Mosimi Area Office quoted a volume of 184,989 MT for the same transaction.

– Further evaluation of reports presented by MTD and Mosimi Area Office revealed that MTD’s figures were misstated.

• Basis for allocation of products to coastal Marketers is not clearly defined and appears to be at Management’s discretion.

• Sub-optimal utilisation of Management’s time:

– Allocation of products to various coastal marketers is currently being handled by the MD, PPMC.

• Ineffective implementation of credit management procedures resulting in outstanding receivables from credit marketers.

– Based on our review of consolidated debtors’ age analysis report for Marketers, overdue debts as at 22nd August 2010 are estimated at N1.36 bn and N5.5bn for Independents and Major Marketers respectively.

• We observed that there are no defined guidelines for provisioning of bad debts from products sales which is not in line with leading and generally acceptable accounting principles.

• Delays in capturing sales transactions on the Sun Accounting System:

– As at August 2010, we observed that transaction entries relating to payment and product lifting by Coastal Marketers for June and July 2010 have not been captured onto the system.

• Poor data management:

– We observed that documents are not adequately filed and some documents are stacked in bags.

• Sub optimal utilisation of technology:

– Prominent usage of excel sheet for various transactions.

– Lack of integrated systems to enable end to end monitoring, reconciliation and tracking of transactions.

Source: Interim Report on the Process and Forensic Review of NNPC: September 7, 2010