April 2, 2010
The Forum of State Governors rose from a meeting a fortnight ago expressing their dismay at the rising level of cash calls paid to Joint Venture Companies (JVCs) from the Federation account. The exasperation of the Governors stemmed from the fact that cash calls being akin to a first charge on the Federation revenue need to be kept to a level that leave a fair amount of funds in the kitty to be shared amongst the three tiers of government.
The Forum of State Governors rose from a meeting a fortnight ago expressing their dismay at the rising level of cash calls paid to Joint Venture Companies (JVCs) from the Federation account. The exasperation of the Governors stemmed from the fact that cash calls being akin to a first charge on the Federation revenue need to be kept to a level that leave a fair amount of funds in the kitty to be shared amongst the three tiers of government.
In an environment where the Federation gross revenue is dwindling, the higher cash calls paid out to JVCs are now translating to lower take homes by the Governor. The pinch seems to be getting more painful by each passing month. Yet, NNPC and the JVCs are asking for even higher cash calls in the budget. On the other hand, cash calls are seed money that is required to meet capital and operating expenditure needs of JVCs. It is therefore an investment in the hope that the JVCs are funded to find and produce more oil and gas that will yield a higher revenue for the Federation. In a period of falling production and falling revenue, it becomes reasonable for those who put up this seed money to ask whether or not their money is being put to good use and if there is light at the end of the tunnel when increased yield from the increased investment will start to materialize and trickle in. This question should be asked both in bad times and in good times but even more so when there are numerous challenges that all levels of government need resources to meet.
The above questions are therefore fair questions for the Governors to ask because as they say, he who pays the piper dictates the tune. Besides, it is only fair that those who put up investment now and again stop to ask those who manage their investments whether their money is being prudently applied with waste and fraud reduced to the barest minimum if not completely eliminated and also to ensure that their investment is earning an acceptable level of return.
Indeed, it is not the Governors alone that should be concerned. There have been concerns across various stakeholder groups in the Nigeria oil and gas industry that Nigeria is not optimising its investments in the oil sector, that the costs of production in Nigeria exceed the costs associated with similar projects in comparable regions and that there is an insufficient basis on which discrepancies, differentials, meaningful analytical insights can be understood. These concerns are fundamental. The Trade Union Congress, from the pivotal positions that our members hold in the oil and gas industry, given our knowledge from within are even more concerned.
The audit of the oil and gas industry that was carried out by the Nigeria Extractive Industry Transparency International (NEITI) for 1999-2004, which reports are available on their website showed that the problem with cash calls is not a confirmation of what cash calls where paid and received as these “on the surface” receipts and payments were fully reconciled as between the Central Bank of Nigeria (CBN), Nigeria National Petroleum Corporation (NNPC) and the JVCs where fully agreed. The problem, if one reads between the lines seemed to summarise into
· Concern that upstream companies (JVCs and PSCs) are gold-plating their expenditure (both capital and revenue), with impacts on quantification of sums paid to them in cash calls on the one hand and what gets into the Federation account by way of revenue from petroleum profit tax and similar government income elements on the other. This double jeopardy punch of paying more than might have been necessary for capital and revenue items as well as reducing what income gets into the government purse is perhaps what the Governors are worried about!
· Concomitant to the above is whether the price of the goods/services arising from contracts and procurement are comparable with the market price of similar goods/services at a similar time.
· Whether a comparison of actual costs incurred in Nigeria between JVCs and Production Sharing Contracts (PSCs) which together are responsible for over 98% oil and gas production and the equivalent level of costs actually compare with each other in terms of cost efficiency and effectiveness.
· Most importantly, whether Nigeria’s costs are out of line with acceptable international levels.
· Whether planned versus actual processes on development of fields, facilities and projects can be subjected to any standard level of analysis to understand and determine the related rates of return, efficiency and productivity such that can give comfort to stakeholders like the Governors whether or not they are making wise investments.
· In recent time, the oil industry in the argument that the National Assembly’s reduction of annual cash call allocation in the budget have resorted to alternative financing of some capital projects, there is uncertainty about the quantitative impact of alternative financing on costs, cost of capital and government revenue generally.
· Whether a fair opportunity is being given to Nigerians to be engaged in the industry either as employees or contractors such that local content of input and earned income is enhanced.
Government and NNPC have agonized during cash call negotiation sessions that they were not comfortable with the rising trend of operating costs in Nigeria, compared to reducing trends elsewhere together with concerns about procurement processes of the JVCs and the PSCs. These twin issues and the concerns that they raise in the minds of the people have been compounded by the fact that NNPC does not have standard metrics established within a performance Measurement and Benchmarking mechanism with which to challenge and drive the industry towards efficiency, effectiveness and a higher standard.
With regards to all the above the players in the oil and gas industry have tried to make the case that as a result of the challenges in the Niger Delta where they operate, a cost premium has to be paid to cover the inherent risks. Be that as it may, there is a general belief that the amounts currently being spent on cash calls can achieve a higher result than it currently does. Alternatively, the current level of operations or achievements can be met with reduced cash calls. Herein lies the challenge that the players in the sector should meet. It is a direct call that they need to be more efficient and effective by aiming for enhanced economy. They need to be seen very transparently achieving more with less. This calls for the need for them to plug all leakages and eliminate waste. It also calls for the application of best practice processes such that the players begin to reasonable benchmark against efficient players in the industry internationally.
To make matters worse, we know for certain that the oil and gas companies are supposed to maintain a uniform accounting system that is supervised by NNPC. This standardization is supposed to help in ensuring accurate records and books of accounts are maintained by Joint Venture and PSC operators, support uniformity of financial and cost accounting and reporting and thus enhance transparency and value for money.
Specifically, this standard accounting format is meant to ensure that a uniform format for accumulating and reporting costs are applied using a chart of accounts set out by NNPC.
However, it is doubtful if the players in the industry comply with these rules or strictly adhere to them. It has been argued by industry accounting experts that companies keep their records in accordance with their preferred systems and find ways to pay only “lip service” to a standard accounting and reporting to fulfill “all righteousness” with the directives of NNPC.
The consequences of this are quite serious. Bearing in mind that the upstream companies operate many ventures in Nigeria at the same time, it becomes difficult to ascertain that the cash calls are going only into the specific projects for which they are given and not other projects in which the Government may not have a direct interest. Without adhering strictly to standard financial and cost accounting methods, inconsistencies and lack of transparency creep into cost accumulation, apportionment and allocation which could mean that Joint venture operations on which cash calls are given bear a disproportionate share of costs to the detriment of the JV government.
The above listed anomalies, unfortunately, cannot be addressed by a simple audit of cash calls. This will lead us nowhere as the NEITI audits have already revealed. What is required is a full blown Value for Money Audit that analyzes out-turn project costs and comparing them with similar projects in Nigeria and elsewhere (Internal and External cost benchmarking) with the following key elements:-
a) Reconciling cash calls paid and received
b) Verifying accounting records to ascertain accuracy and objectivity
c) Analyzing in depth the processes by which capital projects, contracts and procurements are managed and controlled
d) Analyzing, validating and comparing the operating costs between operators
e) Comparing operating costs in Nigeria against costs internationally.
The NEITI of which I am a member of the National Stakeholder Working Group (NSWG) was set up to deal with issues like have been discussed so far as they relate to the extractive industry particularly the oil and gas industry where they have been mandated to inject transparency and accountability into a sector that has been hitherto been most opaque.
The NEITI Act in section 3(a) empowers the NEITI to evaluate without prejudice to any relevant contractual obligations and sovereign obligations the practices of all extractive industry companies and government respectively, regarding acquisition of acreages, budgeting, contracting, material procurement and production cost profile in order to ensure due process, transparency and accountability. In living up to this powers, the NEITI advertised on their website a value for money audit in 2007 which with the following broad terms of reference “The Value-for-Money Audit (hereinafter) ‘VFM Audit’ will audit the terms, procedures, and practices associated with joint ventures and production sharing contracts between Nigeria and commercial oil companies. The objective of this audit is to ensure that:
i) The financial accounting pertaining to such JVs and PSCs fairly represents the actual and reasonable costs incurred in exploring, extracting, and transporting oil, among other such aspects of oil production in Nigeria; and
ii) Such costs associated with oil production in Nigeria are reasonably consistent with the costs associated with comparable operations, domestically and internationally, along with substantiated analysis explaining material deviations arising from evaluation against such comparables.”
As it turned out even though tenders were received and analysed for this laudable audit, the NEITI did not go ahead with this all important value for money audit. The oil and gas opaqueness and doubts about the cost efficiency and effectiveness which a value for money audit and a benchmarking exercise would have at the least given a detailed and informed view to address persists and are getting worse as the frustration gleaned in the Governors statement clearly shows.
True that the Petroleum Industry Bill (PIB) and the Local Content Bill will address some of the problems but it is going to take a long time for the structures set out in these new Bills to take root begin to address real problems. Again these Bills when enacted into law will create their own problems which if we are not careful, will only pile into the existing problems which we have refused to even study, understand and to begin to positively address.
One is tempted to say that there is inertia and an attempt to deal with the problems of the oil and gas industry from a position of ignorance which of course is always a recipe for disaster. My position on this is informed by Government’s attitude and intentions to solve the oil industry very fundamental problems without wanting to carry out studies that will enable informed judgement, decisions and objective solutions to be proffered and effected thus:
a) NEITI audits that have been hailed as opening up the industry and enhancing transparency and accountability in this very vital sector have stalled on the completion of the 2005 audit. The years 2006 to 2009 are now in arrears and the longer the audit is delayed the more difficult it is to obtain the relevant documents for a successful audit. Besides the lessons learnt will no longer be useful as the report becomes stale by the time it is released
b) The Government wants to deregulate the downstream sector without first stepping back to carry out a study to document the problems, understand what is responsible for the inefficiency in the sector before taking the right decision to inject competition, efficiency and effectiveness into the sector. Governments’ position that they will carry out this study after deregulation seems to me like putting the cart before the horse in which case progress can not be made.
c) The Petroleum Industry Bill (PIB) which is meant to address the problems with the upstream sector is so omnibus and sweeping that it will take almost ten years to fully implement the Act when passed. The Bill is the result of the OGIC work. A value for money audit, as discussed above would have supplemented the work of the OGIC, generate useful information on how to attain cost efficiency in the sector whatever the Joint Venture structure is eventually applied (whether Incorporated or Unincorporated). Again, we are putting the cart before the horse and the result is motion without movement.
Decisions reached and actions taken in “a fire brigade” approach cannot be optimal and will not solve deep rooted problems satisfactorily. Well, one could argue that the problem of jumping before we think is peculiar to the oil and gas industry because decisions relating thereto are bound to be “oily” given the importance of the sector to our national budget and well being. But alas, the situation is now becoming a national disease. Just take a look at the power sector, the deplorable state of our road network or the depressing state of our education. We are in deep trouble whatever the sector we look at because we are afraid either to find out facts or we do not want to act from a position of the strength of knowledge.
This is why it is possible for importers of petroleum products to encourage and support a deregulated environment that they know will further entrench their authority to rip off the consumer and guarantee them continued corrupt income; that is why our refineries will never work so that importers can be guaranteed business; that is why the upstream companies will continue to oppose the PIB because it is the first bold attempt to give the oil and gas resource to Nigerians who truly own it.
All in all, it is our considered opinion that the Governors’ call for a cash call audit is appropriate. Such an audit should not just be limited to a confirmation of what cash call has been paid and what cash call has been received. It should go deeper than that to include a full blown value for money audit which should also include cost benchmarking both amongst the companies domestically but also internationally. Unwillingness to carry out detailed study into the challenges that we face, whatever the sector concerned is like jumping blind folded. We should be bold to move away from that attitude and approach. Modern progressive and successful governments around the world do not solve problems in that manner.
In an environment where the Federation gross revenue is dwindling, the higher cash calls paid out to JVCs are now translating to lower take homes by the Governor. The pinch seems to be getting more painful by each passing month. Yet, NNPC and the JVCs are asking for even higher cash calls in the budget. On the other hand, cash calls are seed money that is required to meet capital and operating expenditure needs of JVCs. It is therefore an investment in the hope that the JVCs are funded to find and produce more oil and gas that will yield a higher revenue for the Federation. In a period of falling production and falling revenue, it becomes reasonable for those who put up this seed money to ask whether or not their money is being put to good use and if there is light at the end of the tunnel when increased yield from the increased investment will start to materialize and trickle in. This question should be asked both in bad times and in good times but even more so when there are numerous challenges that all levels of government need resources to meet.
The above questions are therefore fair questions for the Governors to ask because as they say, he who pays the piper dictates the tune. Besides, it is only fair that those who put up investment now and again stop to ask those who manage their investments whether their money is being prudently applied with waste and fraud reduced to the barest minimum if not completely eliminated and also to ensure that their investment is earning an acceptable level of return.
Indeed, it is not the Governors alone that should be concerned. There have been concerns across various stakeholder groups in the Nigeria oil and gas industry that Nigeria is not optimising its investments in the oil sector, that the costs of production in Nigeria exceed the costs associated with similar projects in comparable regions and that there is an insufficient basis on which discrepancies, differentials, meaningful analytical insights can be understood. These concerns are fundamental. The Trade Union Congress, from the pivotal positions that our members hold in the oil and gas industry, given our knowledge from within are even more concerned.
The audit of the oil and gas industry that was carried out by the Nigeria Extractive Industry Transparency International (NEITI) for 1999-2004, which reports are available on their website showed that the problem with cash calls is not a confirmation of what cash calls where paid and received as these “on the surface” receipts and payments were fully reconciled as between the Central Bank of Nigeria (CBN), Nigeria National Petroleum Corporation (NNPC) and the JVCs where fully agreed. The problem, if one reads between the lines seemed to summarise into
· Concern that upstream companies (JVCs and PSCs) are gold-plating their expenditure (both capital and revenue), with impacts on quantification of sums paid to them in cash calls on the one hand and what gets into the Federation account by way of revenue from petroleum profit tax and similar government income elements on the other. This double jeopardy punch of paying more than might have been necessary for capital and revenue items as well as reducing what income gets into the government purse is perhaps what the Governors are worried about!
· Concomitant to the above is whether the price of the goods/services arising from contracts and procurement are comparable with the market price of similar goods/services at a similar time.
· Whether a comparison of actual costs incurred in Nigeria between JVCs and Production Sharing Contracts (PSCs) which together are responsible for over 98% oil and gas production and the equivalent level of costs actually compare with each other in terms of cost efficiency and effectiveness.
· Most importantly, whether Nigeria’s costs are out of line with acceptable international levels.
· Whether planned versus actual processes on development of fields, facilities and projects can be subjected to any standard level of analysis to understand and determine the related rates of return, efficiency and productivity such that can give comfort to stakeholders like the Governors whether or not they are making wise investments.
· In recent time, the oil industry in the argument that the National Assembly’s reduction of annual cash call allocation in the budget have resorted to alternative financing of some capital projects, there is uncertainty about the quantitative impact of alternative financing on costs, cost of capital and government revenue generally.
· Whether a fair opportunity is being given to Nigerians to be engaged in the industry either as employees or contractors such that local content of input and earned income is enhanced.
Government and NNPC have agonized during cash call negotiation sessions that they were not comfortable with the rising trend of operating costs in Nigeria, compared to reducing trends elsewhere together with concerns about procurement processes of the JVCs and the PSCs. These twin issues and the concerns that they raise in the minds of the people have been compounded by the fact that NNPC does not have standard metrics established within a performance Measurement and Benchmarking mechanism with which to challenge and drive the industry towards efficiency, effectiveness and a higher standard.
With regards to all the above the players in the oil and gas industry have tried to make the case that as a result of the challenges in the Niger Delta where they operate, a cost premium has to be paid to cover the inherent risks. Be that as it may, there is a general belief that the amounts currently being spent on cash calls can achieve a higher result than it currently does. Alternatively, the current level of operations or achievements can be met with reduced cash calls. Herein lies the challenge that the players in the sector should meet. It is a direct call that they need to be more efficient and effective by aiming for enhanced economy. They need to be seen very transparently achieving more with less. This calls for the need for them to plug all leakages and eliminate waste. It also calls for the application of best practice processes such that the players begin to reasonable benchmark against efficient players in the industry internationally.
To make matters worse, we know for certain that the oil and gas companies are supposed to maintain a uniform accounting system that is supervised by NNPC. This standardization is supposed to help in ensuring accurate records and books of accounts are maintained by Joint Venture and PSC operators, support uniformity of financial and cost accounting and reporting and thus enhance transparency and value for money.
Specifically, this standard accounting format is meant to ensure that a uniform format for accumulating and reporting costs are applied using a chart of accounts set out by NNPC.
However, it is doubtful if the players in the industry comply with these rules or strictly adhere to them. It has been argued by industry accounting experts that companies keep their records in accordance with their preferred systems and find ways to pay only “lip service” to a standard accounting and reporting to fulfill “all righteousness” with the directives of NNPC.
The consequences of this are quite serious. Bearing in mind that the upstream companies operate many ventures in Nigeria at the same time, it becomes difficult to ascertain that the cash calls are going only into the specific projects for which they are given and not other projects in which the Government may not have a direct interest. Without adhering strictly to standard financial and cost accounting methods, inconsistencies and lack of transparency creep into cost accumulation, apportionment and allocation which could mean that Joint venture operations on which cash calls are given bear a disproportionate share of costs to the detriment of the JV government.
The above listed anomalies, unfortunately, cannot be addressed by a simple audit of cash calls. This will lead us nowhere as the NEITI audits have already revealed. What is required is a full blown Value for Money Audit that analyzes out-turn project costs and comparing them with similar projects in Nigeria and elsewhere (Internal and External cost benchmarking) with the following key elements:-
a) Reconciling cash calls paid and received
b) Verifying accounting records to ascertain accuracy and objectivity
c) Analyzing in depth the processes by which capital projects, contracts and procurements are managed and controlled
d) Analyzing, validating and comparing the operating costs between operators
e) Comparing operating costs in Nigeria against costs internationally.
The NEITI of which I am a member of the National Stakeholder Working Group (NSWG) was set up to deal with issues like have been discussed so far as they relate to the extractive industry particularly the oil and gas industry where they have been mandated to inject transparency and accountability into a sector that has been hitherto been most opaque.
The NEITI Act in section 3(a) empowers the NEITI to evaluate without prejudice to any relevant contractual obligations and sovereign obligations the practices of all extractive industry companies and government respectively, regarding acquisition of acreages, budgeting, contracting, material procurement and production cost profile in order to ensure due process, transparency and accountability. In living up to this powers, the NEITI advertised on their website a value for money audit in 2007 which with the following broad terms of reference “The Value-for-Money Audit (hereinafter) ‘VFM Audit’ will audit the terms, procedures, and practices associated with joint ventures and production sharing contracts between Nigeria and commercial oil companies. The objective of this audit is to ensure that:
i) The financial accounting pertaining to such JVs and PSCs fairly represents the actual and reasonable costs incurred in exploring, extracting, and transporting oil, among other such aspects of oil production in Nigeria; and
ii) Such costs associated with oil production in Nigeria are reasonably consistent with the costs associated with comparable operations, domestically and internationally, along with substantiated analysis explaining material deviations arising from evaluation against such comparables.”
As it turned out even though tenders were received and analysed for this laudable audit, the NEITI did not go ahead with this all important value for money audit. The oil and gas opaqueness and doubts about the cost efficiency and effectiveness which a value for money audit and a benchmarking exercise would have at the least given a detailed and informed view to address persists and are getting worse as the frustration gleaned in the Governors statement clearly shows.
True that the Petroleum Industry Bill (PIB) and the Local Content Bill will address some of the problems but it is going to take a long time for the structures set out in these new Bills to take root begin to address real problems. Again these Bills when enacted into law will create their own problems which if we are not careful, will only pile into the existing problems which we have refused to even study, understand and to begin to positively address.
One is tempted to say that there is inertia and an attempt to deal with the problems of the oil and gas industry from a position of ignorance which of course is always a recipe for disaster. My position on this is informed by Government’s attitude and intentions to solve the oil industry very fundamental problems without wanting to carry out studies that will enable informed judgement, decisions and objective solutions to be proffered and effected thus:
a) NEITI audits that have been hailed as opening up the industry and enhancing transparency and accountability in this very vital sector have stalled on the completion of the 2005 audit. The years 2006 to 2009 are now in arrears and the longer the audit is delayed the more difficult it is to obtain the relevant documents for a successful audit. Besides the lessons learnt will no longer be useful as the report becomes stale by the time it is released
b) The Government wants to deregulate the downstream sector without first stepping back to carry out a study to document the problems, understand what is responsible for the inefficiency in the sector before taking the right decision to inject competition, efficiency and effectiveness into the sector. Governments’ position that they will carry out this study after deregulation seems to me like putting the cart before the horse in which case progress can not be made.
c) The Petroleum Industry Bill (PIB) which is meant to address the problems with the upstream sector is so omnibus and sweeping that it will take almost ten years to fully implement the Act when passed. The Bill is the result of the OGIC work. A value for money audit, as discussed above would have supplemented the work of the OGIC, generate useful information on how to attain cost efficiency in the sector whatever the Joint Venture structure is eventually applied (whether Incorporated or Unincorporated). Again, we are putting the cart before the horse and the result is motion without movement.
Decisions reached and actions taken in “a fire brigade” approach cannot be optimal and will not solve deep rooted problems satisfactorily. Well, one could argue that the problem of jumping before we think is peculiar to the oil and gas industry because decisions relating thereto are bound to be “oily” given the importance of the sector to our national budget and well being. But alas, the situation is now becoming a national disease. Just take a look at the power sector, the deplorable state of our road network or the depressing state of our education. We are in deep trouble whatever the sector we look at because we are afraid either to find out facts or we do not want to act from a position of the strength of knowledge.
This is why it is possible for importers of petroleum products to encourage and support a deregulated environment that they know will further entrench their authority to rip off the consumer and guarantee them continued corrupt income; that is why our refineries will never work so that importers can be guaranteed business; that is why the upstream companies will continue to oppose the PIB because it is the first bold attempt to give the oil and gas resource to Nigerians who truly own it.
All in all, it is our considered opinion that the Governors’ call for a cash call audit is appropriate. Such an audit should not just be limited to a confirmation of what cash call has been paid and what cash call has been received. It should go deeper than that to include a full blown value for money audit which should also include cost benchmarking both amongst the companies domestically but also internationally. Unwillingness to carry out detailed study into the challenges that we face, whatever the sector concerned is like jumping blind folded. We should be bold to move away from that attitude and approach. Modern progressive and successful governments around the world do not solve problems in that manner.
googletag.cmd.push(function() { googletag.display('comments'); });
googletag.cmd.push(function() { googletag.display('content1'); });
googletag.cmd.push(function() { googletag.display('content2'); });