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Evaluating crude production from NEITI, DPR’s perspectives

As the Nigeria Extractive Industry Transparency Initiative (NEITI) and Department of Petroleum Resources (DPR) bicker over the actual volume of crude oil production from Nigeria, ADEOLA YUSUF, in this analysis, shows reasons the disagreement over metering of Nigeria’s crude oil after about 62 years of production is considered a disheartening development

 

 

The Department of Petroleum Resources (DPR) and the Nigeria Extractive Industries Transparency Initiative (NEITI) are not on the same page on the actual volume of crude oil produced in the country.

 

NEITI had claimed on Thursday that the country had no knowledge of the exact volume of the natural asset it produces.

 

Available data

 

Nigeria, according to available data, holds 37,070,000,000 barrels of proven oil reserves as of 2016, ranking 10th in the world and accounting for about 2.2 per cent of the world’s total oil reserves of 1,650,585,140,000 barrels.

The country has proven reserves equivalent to 237.3 times its annual consumption. This mean without net exports, there would be about 237 years of oil left (at current consumption levels and excluding unproven reserves). In terms of consumption, Nigeria consumes 428,000 barrels per day (b/d) of oil as of the year 2016.

 

It ranks 37th in the world for oil consumption, accounting for about 0.4 per cent of the world’s total consumption of 97,103,871 barrels per day.

 

Nigeria consumes 0.10 gallons of oil per capita every day (based on the 2016 population of 185,960,241 people), or 35 gallons per capita per year (one barrel = 42 U.S. gallons), Worldometer says, quoting data, including official figures from the Nigeria government.

 

The nation produces 1,938,542.73 barrels per day of oil (as of 2016) ranking 15th in the world. It produces every year an amount equivalent to 1.9 per cent of its total proven reserves (as of 2016). In terms of exports, Nigeria ships out 85 per cent of its oil production (1,654,739 barrels per day in 2016).

 

Holes in production figure

 

Ogbonnaya Orji, the Executive Secretary of NEITI, however, punctured figures about the exact production of crude oil from Nigeria. Orji had, during a courtesy visit to Mansur Liman, the Director-General of the Federal Radio Corpora tion of Nigeria (FRCN), disclosed that Nigeria could not account for the crude oil being produced.

 

He added that the lack of information had persisted due to the absence of meters at wellheads and the inability to monitor deep offshore fields. He said: “We do not have the capacity to go deep shores to know how much we are producing. As we speak, it is very difficult for any Nigerian to ascertain how much actually we are producing.

 

This is one of the challenges that NEITI is dealing with, because if you do not know how much you are producing, how would you know how much you are expected to earn?

 

“The companies that go deep shore that are involved in offshore exploration, none of them are indigenous Nigerian companies and they cannot really protect the interest of the country as much as Nigerians can. “But, we must concede to those companies, they are doing a great job here, because without them there will be no oil industry.”

 

He added that the agency had consistently recommended that meters be placed on oil wellheads to measure the volume of crude oil produced in the country, in all its oil and gas audit reports.

 

According to him, efforts to reform the oil sector have not been successful because those who benefit from the outdated law governing the sector are hindering the passage of the petroleum industry bill (PIB).

 

“The only law that governs the oil and gas industry in Nigeria currently is the Petroleum Act of 1958. If you use this law in computations of taxes and royalties based on a very old rate, Nigeria loses a lot of revenue,” he said.

 

He noted that the country’s failure to update its laws in the sector meant that when prices go up, the country is unable to derive maximum benefit from the situation.

 

DPR kicks Mr. Paul Osu, Head, Public Affairs, DPR, debunked the claim, saying every barrel of crude produced in the country was adequately captured during the process of extraction.

 

According to him, it is the responsibility of DPR to monitor and account for crude oil production as basis for determining government’s revenue through royalty    payments by operators for sustainable development.

 

He said: “As a further step to boosting crude accounting process from production to export, DPR recently launched the National Production Monitoring System (NPMS). “NPMS is an online platform for direct and independent acquisition of production data from oil and gas facilities in Nigeria.

 

“NPMS, as an electronic data transmission tool at production and export terminals, is designed to better predict the performance of oil and gas reservoirs and better production forecasting.”

 

According to him, the NPMS tool enables DPR to exercise surveillance, perform production monitoring and data analysis for utilisation and forecasting.

 

Osu said DPR, as a business enabler and opportunity house, would continue to develop robust and strategic initiatives to ensure timely and accurate payment of rents, royalties and other revenues due to the government.

Oil sector’s corruption in retrospect

 

Nigeria is sub-aharan Africa’s largest oil producer with reserve levels that far exceed those of its neighbours. While only the 11th largest producer globally, Nigeria’s international importance arises from its high quality crude, accessibility to Western markets, continuing exploration potential and absence of resource nationalisation trends apparent in other oil-producing states.

 

In 2007, oil earnings comprised 85 per cent of government revenue and 99 per cent of export earnings. While the Nigerian government has earned over $400 billion in oil revenues since 1970, standard of living has, however, declined. Nigeria’s massive population, estimated at about 200 million, faces conditions as harsh as the continental average.

 

Oil wealth also fuels the instability, corruption and patronage- driven politics, which characterise governance in the country. Emblematic of these negative governance trends were the 2007 elections.

 

Following eight years in office, President Olusegun Obasanjo handed over power  to Umaru Yar’Adua through elections, which were resoundingly condemned by observers. Despite these challenges, some reform has advanced since the 1999 reintroduction of civil rule.

 

Obasanjo appointed a highly skilled team of technocrats, which implemented banking and insurance sector reform, accelerated the prosecution of top officials for corruption, stabilised the currency, paid off foreign debts and improved budgeting procedures and transparency.

 

Governing the oil sector

 

Four government institutions run Nigeria’s oil industry affairs: Nigerian National Petroleum Corporation (NNPC), which controls a large range of upstream and downstream activities.

 

It has over 9,000 employees and its expansive functions include the operation of 12 subsidiaries, among them refineries, petrochemical plants and oil trading companies.

 

The most crucial subsidiary is the National Petroleum Investment Management Services (NAPIMS), which acts as the industry’s concessionaire, entering into contracts with oil companies on behalf of government. Given the size of its personnel, budget and mandate and its high share of industry expertise, NNPC is the lead government actor in the sector.

 

The Ministry of Petroleum (known for a period as the Ministry of Energy) technically oversees NNPC and leads oil sector policy-making. Apart from the final months of Obasanjo’s administration, the President had served as Minister of Petroleum from 1999.

 

The Minister of State for Petroleum, a junior minister, exercises some influence, but limited unilateral authority. The Department of Petroleum Resources (DPR) is the industry regulator.

 

Until 1988, DPR existed as a unit within NNPC, creating the untenable situation of the regulator being subordinate to the industry’s largest player. While they now operate separately under the Ministry of Petroleum, NNPC retained some regulatory functions.

 

DPR’s mandate includes allocation of oil blocks, the collection of royalties, the enforcement of sector regulations (safety, environment and gas flaring, among others) and other technical oversight tasks. A number of criticisms have been raised regarding the ability of this set of actors to effectively execute their functions.

 

Weak DPR capacity, NNPC intrusion into regulatory and policy-making functions, lack of NNPC oversight and accountability and weak incentives for efficiency and performance generally top the list.

 

How the upstream sector is organised

 

Majority of Nigeria’s oil production is governed by six large joint venture arrangements, with NNPC as the majority shareholder, controlling between 55 and 60 per cent of assets.

 

 

Western oil companies serve as minority shareholders and operate the fields. The earnings of both partners derive from the sale of their respective shares of crude production.

 

The operator then pays a royalty (collected by DPR), based on the amount of production, and Petroleum Profits Tax (PPT), collected by the tax agency) on its earnings.

 

NNPC and the oil company split the operating costs associated with exploration and production. NNPC has consistently struggled to pay its share of operating costs, forcing it to enter into a string of loan arrangements with its company partners.

 

In the 1990s, Nigeria shifted towards offering Production Sharing Contracts (PSCs) for offshore blocks in order to stimulate deepwater exploration, diversify the sector’s corporate participants and avoid the problematic cash-call system.

 

PSC production rose from 106,000 barrels per day (bpd) in 2001 to an estimated 595,000 bpd in 2008, and could double again by 2010. In comparison, the total average production in 2007 was 2.2 million bpd. In a PSC, the operator incurs all risk as it puts up the funds for exploration and production activities.

 

If and when production begins, the oil is divided into “cost oil” and “profit oil”. Cost oil goes to the operator so they can recoup their investments. Profit oil is split between the operator and NNPC at a proportion set in the contract.

 

In addition, the operator pays PPT on its share of profit oil as well as royalties based on production. PSCs result in a lower average take for government than JVs.

 

Where corruption risks are located

 

Within the complex interactions, which constitute Nigeria’s oil sector, several areas stand out as possible loci of corruption. Awarding upstream licenses, governments of most oilrich countries directly allocate the highly valuable licenses to explore and produce oil.

 

Without well-regulated award procedures, such transactions represent possible opportunities for corruption. Nigeria’s Petroleum Act gives the Minister of Petroleum full authority over the allocation of licences for the exploration, prospecting and mining of oil.

 

There are, therefore, no legally mandated processes or oversight mechanisms for the allocation of oil blocks. During the military rule, most licences were awarded on a discretionary basis by the head of state.

 

Upon taking office in 1999, President Obasanjo revoked 11 of the blocks given to senior military officers and their allies by the previous military government just before its departure.

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