Nigeria bank governor alleges oil subsidy racket

Lamido Sanusi

Nigeria’s central bank governor has exposed a multibillion-dollar subsidy racket inside the state-owned oil company that may partly explain huge shortfalls in what Africa’s leading oil producer is earning from its crude.The allegations by Lamido Sanusi about the mismanagement of Nigeria’s oil industry are ensuring a stormy end to his tenure at the central bank, which began when he tackled wide-scale financial fraud during a 2009 banking crash.

Huge shortfalls in oil revenues, which typically account for more than 70 per cent of government revenue, have periodically come to light in Nigeria. However, the sums involved in the governor’s allegations dwarf previous controversies and come as the broader economy is drawing unprecedented attention from global investors.

Lamido Sanusi, who is set to step down as central bank governor in June, provides hundreds of pages of data, expert and legal opinion, and evidence in the form of contracts – seen by the Financial Times – to support his allegations in a memo to a senate committee on finance investigating the matter.

The investigation was prompted by Mr Sanusi’s earlier warnings, contained in a letter to President Goodluck Jonathan, about a gulf emerging between the value of Nigeria’s oil production and the revenues it provides to the state.

The memo points to more than $1bn a month from crude oil sales allegedly owed to the state that Mr Sanusi believes the Nigerian National Petroleum Corporation has failed to remit.

Despite consistently high international prices, Nigeria’s income from oil has been declining sharply, putting pressure on state finances, foreign reserves and the naira, the local currency. The scale of resulting shortfalls is only partially explained by fluctuations in oil production and direct theft from pipelines.

The NNPC, along with Ngozi Okonjo-Iweala, finance and economy minister, and Diezani Alison-Madueke, petroleum minister, are expected to provide their own statements at a senate hearing on Thursday. But Mr Sanusi’s revelations have already prompted a furious rebuttal from Andrew Yakubu, the NNPC’s group managing director, who accuses him of failing to understand “the technicalities of the oil industry”.

‘‘CBN is not an auditing outfit. But what it is doing is now auditing. We have no problem with auditing, but let the professionals, the certified bodies and agencies [do it],” he said.

A senior NNPC official told the FT it would be responding fully to the allegations contained in the memo at Thursday’s hearing.

Mr Jonathan’s opponents have taken advantage of the furore amid rising political tension before 2015 elections and public demands for an audit of the NNPC under his stewardship. The last external audit was initiated before Mr Jonathan came to power.

Mr Sanusi points to possible losses of $20bn in a 19-month period between January 2012 and July 2013 by questioning three main areas in which he alleges that the state has been short-changed.

The most glaring anomaly the memo details is in the allocation of fuel subsidies. At meetings aimed at reconciling the numbers last December the NNPC claimed it had spent $8.49bn on subsidies that were deducted at source by the corporation. These included a subsidy on kerosene.

However, annexes to Mr Sanusi’s memo show that the kerosene subsidy was eliminated in 2009 by a directive of the late president Umaru Yar’Adua. Further evidence, in the form of official data from across Nigeria, shows that nowhere in the country is kerosene sold at a subsidised rate. It is bought by the NNPC at N150, sold to marketers at N40-N50, but retails at N170-N250. Mr Sanusi estimates that $100m goes astray this way each month.

“The margin of 300-500 per cent over purchase price is economic rent, which never got to the man on the street. In dollar terms every vessel of kerosene imported by NNPC with federation money cost about $30m and it was sold at $10 or $11m generating rent of $20m per vessel to the syndicate,” he writes.

Mr Sanusi also questions the legality of billions of dollars of deductions for petrol subsidies allegedly funded outside the legal budgetary framework. He says the figures the corporation has provided imply that it is importing up to twice as much fuel as the country consumes. In reality, he says, private marketers, who in prior investigations have taken the brunt of blame for alleged fraud, supply half the market. In his memo, Mr Sanusi calls on the NNPC to provide evidence that the fuel it claims to have imported actually arrived.

He also raises questions over the value Nigeria is getting from crude oil swaps with international and local traders, in which oil is exchanged for refined fuel imports without cash changing hands.

The expert analysis he attaches lists several ways in which these opaque arrangements, covering an estimated 200,000 to 220,000b/d of Nigeria’s total production, which fluctuates between 2m and 2.2m b/d, could be costing the state. One such contract, dating from 2011, contains a clause permitting the destruction of related documents a year after contract termination, highlighting potential difficulties in ascertaining the true value of swaps.

Finally, Mr Sanusi delves into an equally complex arrangement whereby the Nigerian Petroleum Development Corporation, a subsidiary of the NNPC, entered into “strategic alliance agreements” to finance and manage oilfields in which Royal Dutch Shell had sold off its stake.

Three law firms consulted by the central bank said these agreements contravened the constitution by effectively transferring control of revenues and profits on state-owned assets to private companies.

But, in response to questions from the FT, the main companies involved – Atlantic Energy and Seven Energy – defended both the legality and commercial rationale of what they said were standard service contracts. They said contractually it was up to the NPDC to pay the state its dues after deductions according to a revenue-sharing formula.

Mr Sanusi says that on a total of $7bn in crude shipped under these arrangements, the state received only $400m in taxes from the NPDC during the period he examined.

These allegations have caused a political storm in Nigeria. President Goodluck Jonathan last month asked Mr Sanusi to resign but he refused. The governor can only be removed by the senate which, after defections from the ruling People’s Democratic Party to the opposition, Mr Jonathan can no longer be sure of controlling.

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Economists crunch the numbers

Economists have been crunching the numbers in the wake of revelations by Nigeria’s central bank governor, Lamido Sanusi, about the hole in the country’s finances. The conclusions drawn in independent research using official data are that, whichever way you look at them, the numbers are indeed not adding up.

In search of an explanation, economists, such as Mr Sanusi, have homed in on the puzzle presented by the sharp decline in Nigeria’s oil revenues at a time that both average oil prices and recorded production are only marginally down.

Using official data, analysis by CSL, a stockbroking arm of Nigeria’s First City Merchant Bank, points to a $24.3bn discrepancy in 2012 between the market value of declared production by the Nigerian National Petroleum Corporation and actual remittances to the state. This is higher than the central bank governor’s latest estimates and does not fully take into account some of the explanations subsequently provided by the NNPC.

CSL research shows an even larger but potentially matching hole of $30.8bn in the balance of payments accounts measuring trade and financial transactions between Nigeria and the rest of the world for the same year.

The research notes the growing “errors and omissions line” in the balance of payments accounts, one place that economists tend to look at for indications of capital flight.

Charles Robertson, lead economist for Renaissance Capital, the investment bank, tackles the same conundrum by looking at official figures on imports by Nigeria’s main global trading partners, and comparing these to the country’s own export data.

He finds a persistent monthly gap of $1.5bn. “The $26bn discrepancy from January 2012 to May 2013 might explain some of the country’s fiscal problems,” he writes in an otherwise upbeat look at Nigeria’s fast-growing economy.

Mr Robertson also examines gaps in Nigeria’s import data, noting that the figures from three different sources – Nigerian customs, the IMF and officially recorded exports from some of the country’s main trading partners – “are gloriously inconsistent”.

“Over-invoicing imports is a common method to get cash offshore,” he writes.

According to the central bank governor, the excess crude account, where the government stores savings above the budgeted price of oil, has been drawn down over the year starting January 2013 from $11.5bn to $2.5bn in the wake of emerging fiscal shortfalls.

He warns that, while foreign reserves are averaging $41.5bn and the economy is growing at a steady 6 per cent, Nigeria is now more vulnerable to any sudden drop in the price of oil or any rush to the exit by portfolio investors.