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Two regulatory bodies overseeing Nigeria’s oil sector failed to adequately account for over N313 billion, leading to significant revenue losses for the government, as highlighted in the most recent report from the Auditor General of the Federation.
The agencies implicated in this report are the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA).
The findings from the 2021 audit report, which is the latest from the auditor general, are preliminary observations that require the regulators to clarify their actions. Even when explanations were provided, the auditor general deemed many of them unsatisfactory. The report outlined regulatory shortcomings and a lack of adherence to due process and accountability standards.
Auditors reported that a total of N309 billion and $2.28 billion were largely unaccounted for under the NUPRC and NMDPRA in 2021.
These two agencies were established in August 2021 following the enactment of the Petroleum Industry Act by then-President Muhammadu Buhari. Gbenga Komolafe was appointed as the first Chief Executive Officer of NUPRC in September 2021 and continues to serve in that role, while Farouk Ahmed was appointed as the first Chief Executive Officer of NMDPRA in September 2021 and remains in that position. Consequently, the infractions occurred during the tenure of both individuals.
The unexplained funds include unpaid royalties, uncollected bridging allowances, and discrepancies in marketers’ debt records.
Auditors noted that $1.65 billion was the outstanding royalties owed by the Nigerian National Petroleum Corporation Limited (NNPCL) to the Department of Petroleum Resources (DPR) CBN account concerning Production Sharing Contracts (PSC), Repayment Agreement (RA), and Modified Carry Arrangement (MCA) liftings as of December 31, 2021. However, DPR only received $1.4 billion of the expected $1.65 billion, leaving an outstanding balance of $254 million in royalties for the specified period.
Auditors indicated that no justification was provided for the failure to collect the revenue arrears, which contravenes Paragraph 227 (i) of the Financial Regulation (FR). This regulation mandates that accounting officers responsible for revenue collection must submit an annual return of uncollected revenue by March 31 of each year, with a copy sent to the Accountant-General and the Auditor-General.
The auditor general expressed concern that this practice has led to revenue losses for the government and challenges in funding the 2021 budget.
In response to the auditor general's inquiry, NUPRC stated that the outstanding revenue due from NNPC-COMD MCA/PSC as of December 31, 2021, has been partially paid, totaling $224 million, with $29.6 million still outstanding. The management claimed it is working with NNPCL to recover the remaining amount. However, auditors noted that the management's response did not fully address the issue of recovering the outstanding royalties, thus validating the findings that $29.6 million remains uncollected.
The auditor general recommended that the Chief Executive of NUPRC recover the $29.6 million in outstanding royalties from NNPCL for 2021 and remit it to the Federation Account.
Regarding unjustified deductions by NNPCL, auditors found that N204 billion was deducted from the Oil Royalty assessed by the DPR for 2021. These deductions included costs for priority projects, strategic holding costs, and losses in crude oil and products. The auditor general stated that no valid reasons were provided for these deductions, which also violate Section 162 (1) of Nigeria’s Constitution.
In its response, NUPRC explained that NNPCL deducts funds for government priority projects before remitting royalties, asserting that it has no control over these deductions. The auditor general, however, rejected this explanation, stating it did not adequately address the issue of recovering unjustified deductions from Joint Venture Royalty by NNPC. The auditor general then instructed the NUPRC Chief Executive to recover the N204 billion and ensure that future amounts due to the Federation Account are not subject to deductions by industry operators.
From the review of the Revenue Ledger for 2021, auditors noted that Oil Royalty amounting to $1.74 billion remained unpaid by several oil companies as of December 31, 2021. Additionally, $13.8 million in revenue related to foreign gas sales royalties remained outstanding, while N48.2 billion was in arrears for local gas royalties for the same period. The report indicated that 23 operators failed to pay $496 million in outstanding Federation Account revenue related to the Gas Flare Penalty, and 17 oil companies owed $7.68 million in outstanding concession rentals for 2021. The non-payment of oil royalties by these companies in 2021 denied essential revenue to the Federation Account and violated existing financial regulations, with the report attributing these issues to weaknesses in the internal control system at NUPRC.
In response to this specific issue, NUPRC stated that the oil industry operations often involve time lags of 60 to 90 days for payment by operators following revenue assessments. Despite these delays, NUPRC claimed it is making every effort to ensure timely payments to the Federation as mandated by laws and operational policies.
The agency noted the auditor general's recommendations and stated that efforts are underway to recover the amounts owed. NUPRC reported that between January and August 2022, it collected a total of $4.9 billion and N494 billion from operators, which largely covered outstanding amounts from 2021 and current dues for 2022.
NUPRC emphasized that all payments of outstanding royalties and fees are properly accounted for to the Federation, and while it has an existing internal control system, it acknowledged the auditor’s observations and recommendations for improvement.
The auditors concluded that the response from NUPRC's management did not adequately address the issue of recovering outstanding royalties from oil, gas, concession rentals, and gas flared payable by operators to the Federation Account. The auditor general requested the Chief Executive of NUPRC to justify the non-payment of outstanding oil royalties totaling $2.26 billion and N48 billion by oil companies, and to ensure these funds are recovered and remitted to the Federation Account.
In reviewing the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), auditors found that N28.6 billion in Bridging Allowances from NNPCL Retail to the now-defunct Petroleum Equalization Funds (Management) Board remained outstanding as of December 31, 2021. Bridging allowances are not revenue for the authority but are intended to reimburse transportation costs incurred by marketers for transporting petroleum products nationwide. A reconciliation was reportedly conducted between NMDPRA and NNPC Retail to arrive at this figure for the fourth quarter of 2021, but reconciliation statements and agreements from the meetings were not provided for auditors to review.
In addressing the auditor general's concerns, NMDPRA stated that reconciliations with NNPC Retail are ongoing. The auditor general, however, found that the response from the petroleum authorities did not adequately address the issue of recovering outstanding bridging allowances from NNPC Retail. Consequently, the findings of the report remain valid, and the authority's Chief Executive was instructed to recover the outstanding N28.6 billion in bridging claims from NNPC Retail for 2021 and remit it to the Federation Account.
Auditors also identified N13.5 billion in bridging claims from three major marketers to the defunct Petroleum Equalization Funds (Management) Board that remained outstanding as of the fourth quarter of 2021. The audited documents indicated that reconciliation was conducted between NMDPRA and major marketers to arrive at these figures, but records such as minutes of reconciliation meetings and signed agreements were not provided for audit review. The reasons for the delayed remittance of bridging claims and strategies for recovering the balance were also not presented.
In its response, NMDPRA mentioned that it has established a taskforce to recover all outstanding bridging allowances from marketers and that reconciliation is ongoing for Mobile (11 PLC) and Total PLC bridging allowances. However, the auditor general stated that the management's response did not adequately address the issue raised, and thus the findings remain valid. The auditor general also called for the agency to recover the 2021 bridging claims of N13.5 billion from major marketers and remit the funds to the Federation Account.
The audit revealed irregularities in the balances of six marketers’ indebtedness records, with discrepancies between the submitted total balance of N15.4 billion and the audit's computed total of N16.4 billion, resulting in a variance of N1.08 billion without justifiable reasons. The regulator acknowledged the error but attributed it to the cut-off date and recognition issues. The auditor general insisted that the management's response did not adequately address the issue, and therefore, N1.08 billion should be recovered from the marketers and remitted to the Federation Account.
Further audits indicated that balances from twenty marketers’ indebtedness records, totaling N14.1 billion, remained outstanding without any payments made during the 2021 accounting year. The petroleum regulator stated that regular meetings are held to address the recovery and timely remittance of outstanding bridging allowances.
However, the auditor general concluded that the management's response did not adequately address the issue of recovering the outstanding debts from some DAPPMAN Marketers. Consequently, the agency was instructed to recover the outstanding indebtedness of N14.1 billion from the 20 marketers and remit the funds to the Federation Account.
