The Missing Billions: Nigeria's Oil Corruption

By Joe Brock and Tim Cocks, Reuters

08 March 12

Corruption is only part of the story in Nigeria. A series of environmental 'oil disasters' have gone unreported in the US and have taken a toll on the poorest Nigerians while western oil companies remain unscathed. - JPS/RSN

n important supplier to the United States because of the oil's high gasoline content, Nigeria has attracted billions of dollars of investments from the world's top oil companies. Yet poverty in Africa's second biggest economy is rising, with almost 100 million people living on less than $1 a day, data released last month shows. The percentage of Nigerians living in absolute poverty - those who can afford only the bare essentials of food, shelter and clothing - has risen to around 60 percent.

Two recent audits of the oil industry reviewed by Reuters show billions of dollars in irregularities despite years of government promises to clean it up.

In January hundreds of thousands of Nigerians took part in the biggest protests in the history of Africa's most populous nation. Sparked by a hike in state-subsidized petrol prices, the protests were fuelled by anger at the graft that has for decades channeled oil wealth into the pockets of a minority. Corruption has left oil-dependent Nigeria unable to cater for its basic health, infrastructure or education needs.

Goodluck Jonathan won a presidential election last year that observers said was Nigeria's cleanest since the end of military rule in 1999. Many voters had hopes that he would root out corruption. Amongst the actions announced by Oil Minister Diezani Allison-Madueke in January was the hiring of two accounting firms to audit the industry.

But even as the minister was announcing the new measures, auditors working for the Nigeria Extractive Industries Transparency Initiative (NEITI) - a government-funded watchdog - were winding up another investigation into the oil industry. That study, examining the period 2006-2008, was sent to the relevant government authorities at the end of January. A copy reviewed by Reuters is likely to add to the pressure on Jonathan for reform. It lists discrepancies and shows billions of dollars missing from Nigeria's oil revenues.

The Missing Billions

Getting a clear picture of how much money Nigeria has lost to corruption over the years is almost impossible. The system is hemorrhaging cash in so many places that accountants often struggle to make sense of it all. The state oil firm, Nigerian National Petroleum Corporation (NNPC), does not measure its output. The government estimates that average output is 2 million to 2.6 million barrels of oil a day, making Nigeria Africa's biggest producer.

"Right now, no one can tell you exactly how much of our crude is extracted from our soil," said Orji Ogbonnaya Orji, who sits on the board of directors of NEITI. "We depend on records from the oil companies. That clearly has to change."

The NEITI audit shows some startling gaps: $540 million missing from $1.675 billion in signature bonuses - these are advance payments to develop fields, a standard producer country demand. Then there's 3.1 million barrels of oil missing from NNPC declarations about its joint ventures compared with the figures released by NNPC's international partners. That equates to 0.25 percent of the output. NNPC also received $3.789 billion in dividends from Nigeria LNG, a liquefied natural gas venture over the 2006-2008 period, but there is no record of those dividends being paid into the federal accounts.

An NNPC spokesman did not respond to requests to explain the irregularities listed in the report in detail. The firm denies malpractice. When asked about corruption last month, NNPC managing director Austin Oniwon replied that the issue was overblown. "Corruption in NNPC is in the imagination of some people," he said.

The NEITI report says foreign oil majors may have underpaid royalties "of $2.33 billion arising from subjective interpretation of volume, pricing," and grading variables. "We are questioning the basis of those calculations," Orji explained. "They are not calculated on the basis of empirical fact. And there is connivance by officials."

Foreign firms also seemed to have underpaid petroleum profit tax by over $1 billion, NEITI said. The report recommended a review of the tax returns of Chevron and Exxon Mobil. Exxon officials were not immediately available to comment. A Chevron spokesman said the firm "complies with all laws and regulations in the locations where we operate, as a matter of long-standing policy Chevron does not release specific financial details."

The NEITI audit has only just been delivered to the government. Another audit, this time by KPMG and focusing on the state oil firm, was delivered to the oil ministry in Nov 2010. The government has not published it. A copy reviewed by Reuters shows similar practices. It notes that NNPC invoices for domestic crude in U.S. dollars but pays the government in naira and that "exchange rates used by NNPC were lower than (those) ... published by the CBN (central bank)", causing a loss of 86.2 billion naira ($550 million) to the treasury from 2007 to 2009.

KPMG also said fuel subsidy claims were based on unverified declarations of fuel imported or refined rather than actual retail sales at pump stations. Analysts say this highlights a scam: fuel import ships - operated by private importers, not just the NNPC - are declared full in order to claim subsidies but are really half empty, having sold to Nigeria's neighbors where prices are higher.

"Some of the issues that were revealed were shocking," the head of the House of Representatives fuel subsidy probe, Farouk Lawan, said. He added government officials had understated NNPC payments by billions of naira. Daily consumption of petrol is 35 million liters, yet importers were being paid for 59 million liters a day.

"That means subsidy is being paid on 24 million liters but is not being consumed by Nigerians," he said. "Either those products were not brought in or they were brought in and diverted or ... smuggled out. Most likely a combination."

Asked about the KPMG report in January, President Jonathan pointed out that he had set the investigation in motion. "If there are queries, we further those queries to them (the NNPC) to answer. If people have been found to be corrupt, the law will take its own course."

Ivestigation, Inaction

At Nigeria's annual oil and gas conference in Abuja at the end of last month, oil men traded business cards with Nigerian politicians. The talk was all optimism, offshore oil platforms and new pipeline technologies.

"Corruption is on everybody's minds but nobody's lips," said Bismarck Rewane of Lagos consultancy Financial Derivatives.

Asked at the conference about corruption, Oil Minister Allison-Madueke said the government was "mindful of the challenges still within the sector ... financial leakages and other deep-rooted inefficiencies," and that "there is undoubtedly a need for change."

Nkem Onyikawa, managing partner of one of the firms involved in a new oil audit, Sada, Idris and Co. said the work would be finished within nine months. Allison-Madueke has also set up three committees to look into bottlenecks to oil reform, including one to hurry up an oil bill seen as vital to transparency that has been stuck for years.

"Several panels and committees have been set up to reform the petroleum industry, and over the years many of these efforts have been stalled," Allison-Madueke said in a recent speech.

Graft has not deterred oil firms from doing business in Nigeria. Last month Exxon signed a 20-year license on a field that makes up nearly a quarter of Nigeria's output.

A foreign oil executive summed it up thus: "Ideally what you want is a clean and transparent oil business, but failing that you want a business where you know the rules and how to play by them."

Last week James Ibori, the former governor of an oil-producing state, pleaded guilty in a London court to corruption, a development many Nigerians welcomed but which highlighted something: No such successful prosecution of a senior figure has happened on home soil. ($1=157.7300 naira)

(Additional reporting by Camillus Eboh in Abuja; Writing by Tim Cocks; editing by Jane Baird and Janet McBride)

(This story was corrected to remove reference to Bayelsa state in final paragraph)