Nnpc Kpmg Report

7/31/2019 Nnpc Kpmg Report

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Interim Report on the Processand Forensic Review of NNPC

07 September 2010

This report contains 40 pagesConsolidated Detailed Findings v1.doc

Current State Assessment Report on the

Process and Forensic Review of the Nigerian

National Petroleum Corporation (Project

Anchor)

ENERGY AND NATURAL RESOURCES

Federal Ministry of Finance

22 November 2010


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Consolidated Detailed Findings-v1.docx 2

Document review and approval

Revision history

Version Author Date Revision

This document has been reviewed byReviewer Date reviewed

12345This document has been approved by

Name Signature Date reviewed12345


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Disclaimer

This report is made by KPMG Professional Services (KPMG), a Nigerian partnership and amember firm of the KPMG network of independent firms affiliated with KPMG InternationalCooperative (KPMG International), a Swiss entity and S.S. Afemikhe & Co(SSA) (theConsultants). KPMG International provides no client services. No member firm has anyauthority to obligate or bind KPMG International or any other member firm vis--vis third-parties, nor does KPMG International have any such authority to obligate or bind any memberfirm.

Unless otherwise specifically stated in the engagement letter, any advice or opinion(deliverable) relating to the provision of this Service is provided solely for the use of theGovernment of the Federal Republic of Nigeria represented by the Permanent Secretary, FederalMinistry of Finance (the Government or the Ministry).

Should you wish to disclose or refer to such deliverable in any way, including but not limited to,any publication on any electronic media, to any third-party, you are required to notify suchthird-party of the fact that the said deliverable has been provided to you for your sole use andbenefit and is based on specific facts and circumstances provided by you and pursuant to theConsultancy Services Agreement made on 26 day of July 2010.

Such third-party may not rely on such deliverable and the Consultants, to the fullest extentpossible, shall accept no responsibility or liability to that third-party in connection with theservices.

During the supply of the services, we may supply oral, draft or interim advice, reports orpresentations. In such circumstances, the Consultants written advice or final written report shalltake precedence. No reliance should be placed by you on any oral, draft or interim advice,reports or presentations. Where you wish to rely on oral advice or an oral presentation, youshall inform us and we will provide documentary confirmation of the advice.

The Consultants shall not be under any obligation in any circumstance to update any advice orreport, oral or written, for events occurring after the advice or report has been issued in finalform.


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Glossary of Terms

Acronym Definition

AGO Automotive Gas Oil (Diesel)

CBN Central Bank of Nigeria

CIP Central Invoice Processing

COMD NNPCs Crude Oil Marketing Department

DAPPMA Depot and Petroleum Products Marketers Association

DEXCOM Directorate Executive Committee

DPK Dual Purpose Kerosene

DPR Department of Petroleum Resources

DTB Dated Brent

EMD Electro Motive Diesel

EDO Executive Director, Operations

ETD Engineering and Technology Division

ETSD Engineering and Technical Services Department

FAAC Federation Accounts Allocation Committee

FAD Finance and Accounts Division

FGN Federal Government of Nigeria

FMF Federal Ministry of Finance

FPO Foreign Purchase Order

GED NNPCs Group Executive Director

GED E&P Group Executive Director, Exploration and Production


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Acronym Definition

GMD NNPCs Group Managing Director

GNED Group Non-Executive Director

IDSL Integrated Data Services Limited

IOC International Oil Company

IPMAN Independent Petroleum Marketers Association of Nigeria

JOA Joint Operating Agreement

JV Joint Venture

JVCC Joint Venture Cash Calls

KPMG KPMG Professional Services

KRPC Kaduna Refining and Petrochemical Company

LC Letter of Credit

LIBOR London Inter Bank Offered Rate

LNG Liquefied Natural Gas

LPFO Low Pour Fuel Oil

LPO Local Purchase Order

MEXCOM Management Executive Committee

MIS Management Information Systems

MPN Mobil Producing Nigeria Limited

MTC Management Tender Committee

MT Metric Tonnes

MTD Marine Transportation Department


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Acronym Definition

MTU Marine Transportation Unit

NAOC Nigerian Agip Oil Company

NAPIMS National Petroleum Investment Management Services

NGC Nigerian Gas Company

NIBOR Nigerian Inter Bank Offered Rate

NNPC Nigerian National Petroleum Corporation

NOR Notice of Readiness

NPA Nigerian Port Authority

NPDC Nigerian Petroleum Development Company

OECD Organisation for Economic Co-operation and Development

OPCOM Operating Committee

OSP Official Selling Price

PEF Petroleum Equalisation Fund

PMS Premium Motor Spirit (Petrol)

POCNL Phillips Oil Company Nigeria Limited

POOC Pan Ocean Oil Corporation

PPMC Pipelines and Products Marketing Company

PPPRA Petroleum Products Pricing Regulatory Agency

PSC Production Sharing Contract

PSF Petroleum Support Fund

PV Payment Voucher


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Acronym Definition

SBU Strategic Business Unit

SSA S. S. Afemikhe and Co.

SPDC Shell Petroleum Development Company

SPM Single Point Mooring

STS Ship to Ship Charges

SUBCOM Sub Committee

TECOM Technical Committee

TEPNG Total Exploration and Production Nigeria Limited

TOR Terms of Reference

VAT Value Added Tax

WRPC Warri Refining and Petrochemical Company


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Contents

1 Executive Summary 9

2 Introduction 102.1 Project Background and Approach 10

2.2 Project Scope 102.3 General Work Approach 112.4 Engagement Structure 11

3 Process Workstream 133.1 Objectives 133.2 Work Approach 133.3 Limitations 14

4 Detailed Findings 164.1 Crude Oil Revenue Flows 16

4.2 Product Sales 26


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1 Executive Summary

wi


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2 Introduction2.1 Project Background and Approach

The Federal Government of Nigeria (FGN) has noted recent reports ofpossible inaccuraciesin the crude oil and gas revenues remitted to the Federation Account by the Nigerian NationalPetroleum Corporation (NNPC). The reports arose from allegations of wrongful deductions atsource by the NNPC to fund its operations.

The FGN has also noted that despite the increase in international oil prices and Nigerias export

volumes, there has not been a commensurate improvement in the countrys external reservesposition. This has been further aggravated by allegations of unauthorised changes made in themanagement of the foreign bank accounts used for the receipt of the nations crude oil and gassales proceeds by the NNPC as these sales proceeds are said to be received into NNPC-managedforeign bank accounts

Furthermore, there are concerns that the procedures for managing and reporting the countryscrude oil and gas revenues are opaque and characterised by gaps, overlaps and inconsistenciesin the role of key parties responsible for the assessment, collection and reporting on theserevenue streams.

Against the backdrop of these concerns, the FGH, through the Federal Ministry of Finance(FMF or the Ministry), engaged KPMG and SSA to carry out a process and forensic reviewof NNPC.

This Inception Report articulates the methodology and framework adopted for the assignment. Itsets out the project work plans, and other information relating to the project organisation andcontrol procedures.

2.2 Project ScopeBased on the Terms of Reference (TOR), the specific scope of this review shall be:

To determine the accuracy and completeness of reported crude oil and gas revenuesaccruing to the NNPC (both Federation and NNPC crude) during the period 2007 to 2009;

To establish the underlining reasons for major inaccuracies and the NNPC officials involvedin the irregularities;

To review the existing governance and institutional arrangements for managing thecountrys crude oil and gas revenues (export and domestic) through NNPC;

To carry out an assessment of deductions made by NNPC (including petroleum-product-related subsidy and joint venture cash calls) before remitting to the Federation Account;

To examine other components of NNPCs operating and capital expenditure between 2007and 2009;

To establish, if any, discrepancies between reported and declared revenue receipts;


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To define and map out the processes and procedures by which the NNPC computes,determines, and remits revenues to government (including the process of marketing equitycrude), by reviewing the existing procedures, flowcharting the current processes andevaluating the relevant controls, with a view to identifying existing strengths, inherentweaknesses, past errors and irregularities, and any practical prospects for improving theexisting processes and procedures;

To review the volumetric data involved in the computation of crude oil and gas revenues,that is, to validate the export and domestic crude oil volumes and values;

To review a sample of past transactions for accuracy, validity, appropriateness andefficiency; and

To summarise and report upon any exceptional issues noted during the engagement andwhich may have significant impact on the overall integrity of the system for remittingoperating surpluses and other revenue receipts.

2.3 General Work ApproachOur overall approach is depicted schematically below:

2.4 Engagement Structure

Project

Planning and

Organisation

REPORT

Reporting

Phase 3Phase 2Phase 1

PLAN REVIEW

Revenue Process Review

Revenue Governance Review

Transaction and Forensic Review

Project Management and Quality Assurance

Status ReportingStatus Reporting

2 months


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Figure 2.1: Project Team Structure

MINISTER OF FINANCE

PROCESS

WORKSTREAM

(KPMG)

Concurring Partners (KPMG)

Michiel Soeting

Kevin West

Kunle Elebute

Bisi Lamikanra

Chibuzor Anyanechi

GOVERNANCE

(KPMG)

CRUDE

SALES

(KPMG)

PAST

TRANSACTION

S (SSA)

SUBSIDY

(SSA)

JV

CASH CALLS

(SSA)

Consulting Partners/Consultants

(SSA)

Sam Afemikhe

Chris Nurse

David Quinn

Andy Nmorka

FORENSIC

(KPMG)

DOMESTIC

CRUDE

(KPMG)

PRICING

(SSA)

EXPORT

CRUDE

(KPMG)

CAPEX

(SSA)

OPEX

(SSA)

Dimeji Salaudeen

(KPMG)

Samuel Afemikhe

S. S. Afemikhe & Co.(CA)

Project Management Team

Dr. Muyiwa Adedeji

(Fed. Min. of Finance)


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3 Process WorkstreamThis section of the report details our findings with regards the process review of NNPCsrevenue processes. The objective of the process review was to analyse existing processes as wellas identify gaps/ issues in the processes and proffer recommendations to bridge identified gaps.The process review covered the following processes:

Crude Sales Crude Sales Allocation Crude Oil Pricing Renewal/ Issuance of Crude Sales Contract Crude Oil Lifting and Sales Crude Sales Invoicing, Collection and Remittance

Product Sales Renewal/Issuance of Importation Supply Contracts Crude Oil Refining Product Reception Transportation and Distribution of Products Product Sales Product Sales Invoicing, Collection and Remittance Processing of Subsidy

3.1 ObjectivesThe revenue process review of NNPC was carried out to analyse the above processes withregards the following amongst others:

Adequacy of existing controls to mitigate inherent risks; Adherence to laid down policies as well as the provisions of relevant laws, rules and

regulations;

Alignment with leading practices in the Oil and Gas industry; Adequacy of, and security over the accounting and other financial records maintained in

respect of key transactions;

Adequacy of the forms in use, checklists and templates, key reports generated, etc; and Utilisation of technology for increased effectiveness and efficiency.

3.2 Work ApproachOur overall work approach for execution of the process review is presented in the schematic

below:


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In order to achieve the objectives of the engagement, we performed the following key tasks:

Defined data/ information requirements and gathered relevant background materials. Reviewed background materials to understand NNPC's organisational context and define

revenue process hierarchy (i.e. process and sub-processes).

Conducted one-on-one interviews with relevant process owners/operators to validateunderstanding of NNPC's revenue management and reporting processes and obtainedrelevant supporting documents.

Documented and validated as-is processes. Conducted research and collated leading practices in the revenue cycle for the oil and gas

industry

Conducted detailed analysis of as-is processes to identify gaps, issues and improvementopportunities.

Conducted a test of operating effectiveness of key controls within the revenue process. Analysed the revenue reporting practices of NNPC for compliance with the provisions of

relevant laws, rules and regulations.

Analysed the adequacy of, and security over the accounting and other financial recordsmaintained in respect of key transactions.

Benchmarked the revenue accounting and reporting practices of NNPC against leadingpractices and determined the gaps/ improvements.

Documented key findings and their implications. Proffered recommendations to bridge identified issues.

3.3 LimitationsAs at the time of compiling this report, detailed review and analysis of some processes have notbeenperformed. This can be attributed to NNPC process owners inability to provide supportingdocuments required for the process validation/ analysis. The outstanding process and supportingdocuments are highlighted below:

Issue/ Renew Importation Supply Contracts.o Evaluation criteria for commercial bids submitted in respect of petroleum products

importation.

Prepare Report

Gather Data and Document

As Is Processes Analyse "As-is" Processes


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o Criteria for allocation of product(s) and product volumes to importers/ suppliers.o Periodic prequalification list of approved products importers/ suppliers. (2007-2009).


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4 Detailed Findings4.1 Crude Oil Revenue

Monthly Production Quota

Findings Implications Recommendations

Production /Commercial Allowable volumeshave been observed to consistently exceedOPEC quota of 1,673,000 BBL/D for the sixmonth period (April to September 2010).

Non-compliance with OPEC quotasby OPEC countries could exert adownward pull on crude oil priceswhich results in reduced revenuesfor the government.

Nigeria may be fined for exceedingOPEC quota.

Proactively initiate steps with OPEC to reviewand agree/ update current quota.

Technical Allowable (TA) is defined by DPRto preserve the country oil/gas reserves. Thus,monthly production estimates should notexceed TA. However, instances have beenobserved where technical allowable wasexceeded:

- Total and Chevron JVsApril 2010- NAE and Esso (ERHA ) PSCsMay 2010

Non adherence to TA has apotential to negatively impact onthe countrys oil/gas reserves

projections and plans.

Appropriate justification and approval forexceeding TA should be duly documented.

Implement additional controls to mitigate non-compliance to TA:

- Review of compliance to TA beforeapproval of production.

- Monitoring and reporting on non-compliance.


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Monthly Production Quota


Poor data management- No centralized location for storing

electronic copies of historical productionand allocation data. These information arestored on personnel (individual)workstations.

Potential loss of historicalproduction information in event of

staff turnover or system failure. Difficulty in retrieving prior

documents/ reports.

Documents should be maintained in a centrallocation.

Implement procedures for ensuring effectiveand timely filing/storage and back up ofdocuments

Ensure periodic system back-up to minimizedata losses


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Pricing


Review of Official Selling Price (OSP)computation by GED C&I in addition to reviewby GED E&P. This appears to be a legacy issueas GED C&I was formerly the GGM ofCOMD.

Duplication of review could resultin long process cycle.

Review existing crude oil pricing process toeliminate duplication of tasks/ bottlenecks.

Cycle times should be defined for the processof determining crude oil pricing.

Currently, determination of Official SellingPrice (OSP) is performed by using differentvariables (dated brent - DB, differentials - Dand premium - P) i.e. OSP= DTB+D+P. Amodel was developed but is currently not beingutilized based on its lack of robustness.

Lack of a standard model couldresult in an incomplete evaluationof OSP variables such as freightcosts, seasonal influences andoperational challenges.

Implementation of a robust and scalable pricingmodel to ensure a complete, consistent andsystematic approach for determining OSP.

We observed variances in crude sales priceespecially with regards to domestic sales toPPMC. Crude sales to NNPC were at lowerprices (lower than approved OSP) than to otheroff-takers which is not in compliance with

Government's directive.

- It appears that there is no formaldocumentation to support this decision/practice.

Sub-optimisation of crude salesrevenue/ potential revenue loss bythe Federation.

Non-compliance with laid downpolicies and procedures.

Potential conflict of interest withCOMD acting as agent toGovernment and being under NNPCwho is also its customer.

Review and update policies on crude sales toensure that external off-takers and PPMC areinvoiced at a uniform price.


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Pricing


NNPC is invoiced in US$ for domestic crudeallocations but is expected to remit the

equivalent Naira value to the FederationAccount. However we observed that exchangerates used by NNPC were lower than theaverage exchange rates published by the CBNduring the review period.

- Exchange rate variances for 2007, 2008 and2009 were estimated at N25.7 bn, N33.8 bnand N26.7 bn respectively. (using CBNrates for the month of transaction)

- NNPC claimed they obtained the exchangerates from CBN via phone but there was nodocument to substantiate the claim.

Significant underpayment ofdomestic crude cost to the

Federation Account.

Enforce policy to ensure NNPCs exchangerates are consistent with CBNs published

rates. Supporting documents regarding applicable

exchange rates should be obtained from CBNand filed appropriately for record purpose.


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Issue/ Renew Term Contracts


The practice of renewing crude sales contractson an annual basis is not in line with leading

practices.

This practice could result indiscretionary renewal of contracts.

Extend contract duration and implementprocess of evaluation Suppliers performance

on an annual basis.

Evaluation criteria for renewal of contracts arenot clearly stated in the contract document:

- Renewal of contract was said to be basedon performance of off-takers. However, thebasis and process for determiningperformance is not clearly defined.

- In 2009, when there was a need to reducethe number of off-takers from 28 to 21 dueto supply constraints, the basis forshortlisting the offtakers appears to bebased on discretion as we were notprovided with any documentation tosupport the selection process.

Selection of off-takers might not betransparent and objective.

The selection exercise could bebased on individual discretion andwrong assumptions/ criteria.

Evaluation criteria and key performancemeasures should be clearly defined anddocumented in crude sales contact.

Standard forms should be used for evaluationof off-takers performance with inputs from allrelevant partiesFinance, Operations, COMDe.t.c.


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Issue/ Renew Term Contracts


We observed some instances where crude oilwas allocated to off-takers who were not on

the approved list:- Ovlas Trading (2,852,316 barrels and

906,269 barrels in 2007 and 2008respectively)

- Petrojam (2,818,914 barrels in 2007)- Oil Fields (950,166 barrels in 2007)- Zenon (906,000 barrels in 2008)

Crude might be sold to non-credibleoff-takers.

Relevant guarantees (e.g. LCs) andsafeguards might not implemented.

Implement additional controls to ensureadherence to policy.

- List of approved off-takers should bereviewed before the execution of crude oilsales agreement/ contract by relevantofficers in NNPC.

- Off-takers should be certified to be on theapproved list before loading clearance isprocessed and approved for off-takersvessels.

Monitor Production


NNPC and JV operators do not performreconciliation for gas/ feedstock sold to NLNG.

Potential for misstatement ofNNPCs entitlement/ revenue from

the sales of gas/ feedstock toNLNG.

Periodic reconciliations should be conductedbetween NNPC and JV operators to detect andresolve errors / exceptions from the sales ofNLNG feedstock.


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Lift and Ship Hydrocarbons


Late processing of marketing clearance to loadvessels due to delays in the receipt of Letters of

Credit (LCs) from Off-takers.- Delayed receipt of LCs was attributed to

both Off-takers and NNPC.

This causes delays in the lifting ofcrude oil by vessels at the loading

terminal.

A clear penalty must be defined and enforcedfor all lifters.

Enforce compliance of Off-takers to thestipulated timelines:

- LCs: 5 days before laycan date- Marketing Clearance: 3 days before laycan

date


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Process Customer Invoice


Long cycle time for billing of off-takers due todelays in receipt of relevant documentation

from zonal office. However, off-takers areexpected to remit payment irrespective ofreceipt of bill.

Unauthorised extension of creditresulting in undue exposure to off-

taker

Review billing process to drive prompt billingof off-takers and explore alternative medium

for receipt of invoice documentation e.g.faxing, scanning ,etc

Define KPIs for processing and dispatch ofbills.

Non compliance with guidelines relating todefined margin of error on LC value (+/-5%):

- Variance between the invoice value and LCvalue exceeds the defined 5% error margin.Examples include invoice numberCOS/02/PPMC/026/08 (Difference of10.8% i.e. Cargo valuation and LC valueare $95,396,587 and $85,000,000respectively).

The risk exists that quantity ofcrude lifted by off-takers wouldexceed the contractual volumes.

Update and enforce lifting policies to ensureactual lifting volume and value do not exceeddefined LC margin of error.

Conduct periodic review of LCs against cargovaluation to proactively identify need to updateLC value.


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Process and Reconcile Collections


We observed that crude oil sales andcollections are not promptly captured on the

accounting system. Typically, thesetransactions are captured in the accountingsystem after the transaction have beenapproved at FAAC meeting which is typicallytwo (2) months in arrears.

Inaccurate sales and collectioninformation on the financial systems

and multiple data sources as data ispredominantly managed outside thesystem.

Tracking and ageing of receivableswould be performed manually.

Late detection of errors and absenceof relevant audit trail.

Root cause analysis of adjustmentnot adequately determined/resolved.

Review billing and revenue accountingprocesses to enable real time processing of

transactions. Explore possibility of system generated

invoices.


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Remit Funds into Federation Account


From our review of the cycle time for theremittance of domestic crude cost into the

Federation Account, sweeping of funds took anaverage of 110120 days as against the 90 daycredit line offered to NNPC.

Federation might be deprived oftimely utilisation of funds.

Non compliance with contractualagreements.

Unauthorised extension of credit toNNPC.

Review and update remittance process toensure timely remittance of funds.

Define KPIs for sweeping of funds into theFederation Account.


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4.2 Product SalesIssue/ Renew Importation Supply Contracts


The process of selecting Suppliers forimportation of products is documented but thedocumented procedures are not adhered to. Weobserved that the Evaluation Committee onlyrecommends prices for the importation ofpetroleum products while actual allocation ofimportation contracts (especially volumes)appear to be at Managements discretion.

The risk exists that the productimportation process could be proneto abuse.

The limited role of the Committeein the contracting/ bid process forproducts import hampers thetransparency and objectivity of theprocess.

Management needs to empower EvaluationCommittee to evaluate and determine shortlistfor approval based on predefined and approvedcriteria.

Review and update policies and procedures forissuance of importation supply contracts.

- Clearly define criteria for allocation toensure transparency and objectivity.

- Selection should be based on definedcriteria.

Evaluation of quotes/ bids from suppliersappears to be a redundant process becauseagreed product import prices are based onprojected in-house estimate irrespective of

prices quoted by suppliers.

Credible suppliers might decline tosupply petroleum products if importprices are not competitive.

There is increased possibility thatsuppliers might bring in adulteratedpetroleum products based onuncompetitive prices.

Review process for determining product importprices and utilize a more robust/ flexible modelto ensure prices are competitive and enableSupplier recover investment.


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Issue/ Renew Importation Supply Contracts


Non compliance with approved policies/procedures. We observed that contracts for the

importation of petroleum products wereawarded to companies/ suppliers not listed inthe approved prequalification list used for thefourth quarter 2008 importation tender.

- Astana Oil Corporation Limited- Natural Energy- Oando

Potential risk that contract could beawarded to Suppliers who do not

meet defined requirements. Inability of Suppliers to meet

contractual obligations.

Review process and implement relevantmitigating controls

- Only Suppliers on approved list should beinvited to tender.

- Evaluation Committee should review bidsreceived and only evaluate bids fromapproved Suppliers.

- Approval of importation supply contractsand payments should include a compliancereview to ensure only approved Suppliersare utilised. Any exception should be dulydocumented and approved by the GMD.

- Conduct of periodic independent reviewsby Audit to ensure adherence to policiesand procedures.

Monitor and Receive Product Imports


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Delays in discharge of product results insignificant demurrage payments.

- Based on our analysis of productimportation profiles between January 2008and June 2010, average demurrage dayswere estimated at 31 days.

Demurrage payments are made byNNPC;

- We observed that NNPC wasliable to pay an aggregatedemurrage of $198 millionduring the review periodtranslating to an average of $6.6million per month.

Review and update planning process for receiptof product imports to enable more efficientplanning of cargoes and minimise delays.

Explore long term solutions to resolve jettyfacilities constraints:

- Upgrade of jetty facilities productsspecifically with regards drafts.

- Improved local production of petroleumproducts.

Late payment to Suppliers of importedpetroleum products:

- The importation contract stipulates thesettlement of suppliers invoice 45 days

after submission of Notice of Readiness(NOR) to NNPC. However, actual paymentto Suppliers ranges between 220 and 240days after the receipt of NOR.

- The late payment was attributed to cashflow issues as a result of the Corporationsinability to recover costs incurred onproduct importation.

NNPC is liable to pay interestcharges as a result of late settlementof invoices from suppliers. Thecurrent interest charges from 45days after NOR is LIBOR + 1%.

- This increases cost of sales andnegatively impacts NNPCs

ability to recover cost under thecurrent pricing regime.

Ensure proactive capture of invoices on thesystem to recognise obligation and enableeffective payment planning.

Ensure aggressive and complete collection ofcrude oil sales to improve cash flow.

Review import process and pricing to ensureproducts are imported in a cost effectivemanner and costs are fully recovered by crudesales revenue.


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Refine Crude Oil


Low capacity utilization of the refineries:- Capacity utilization for the four refineries

in 2008 and 2009 are estimated at 25.3%and 11.2% respectively.

- The low capacity utilisation was attributedto partial/ complete shutdown of processingplants at the refineries as well as pipelinevandalism.

Continued dependence on importedpetroleum products to supplement

local production. High refinery overheads with low

profitability.

Turn-around-maintenance of refineryprocessing plants to improve capacity.

Ensure continuous monitoring/ surveillance ofpipelines to reduce the frequency of occurrenceof pipeline vandalism.

Non-integration of inventory, procurement andaccounting systems:

- Currently, crude oil receipt as well as theproduction, verification and evacuation ofrefined petroleum products are managed onMS Excel.

Lack of end-to-end reconciliation ofinventory to product sales.

Increased possibility of manualerrors.

Late or non detection of inventorylosses/ reconciliation issues.

Inaccurate inventory recordsresulting in misstatement of

financial records.

Deploy an inventory management system thatsupports the refineries supply chain processes.

- Currently, NNPC is in the process ofimplementing an ERP solution (SAP)which is expected to address the challengesbeing faced with non-integrated/ stand-alone systems.

- There is a need to ensure that functionalrequirements meet and address the issues

currently faced before the implementationcan be successful.


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Refine Crude Oil


The processing fee currently earned by therefineries for processing crude oil into

petroleum products is not sufficient to meet thetotal operating cost of the refineries.

- Our analysis of the financials of WRPC andKRPC between 2006 and 2008 revealedthat the revenue earned from processing feewas significantly lower than the operatingcosts resulting in losses for the tworefineries during the review period.

- We also observed that the processing fee isdetermined by a committee constituted bythe GED, Finance and Accounts and thelast review was carried out in 2005.However, the basis for determining theprocessing fee rates does not appear to bein line with current realities.

Inability of refineries to generatesufficient revenues to meet financial

obligations and operating cost. The refineries are not autonomous

as they continue to depend on theCorporate Headquarters for funding.However, long term funding byCorporate Headquarters is notsustainable.

Need to conduct a detailed review of therefineries operations to determine solutions to

boost capacity, improve operating efficiency/effectiveness and reduce operating cost andnon-performing assets.

Review processing fee to ensure optimalpricing and enable better recovery of operatingcost.


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Determine and Process Subsidy


We observed that NNPCs subsidy claims andPPPRAs verification are based on volume of

petroleum products available for sale (volumeof products imported and actual productionfrom the refineries) as against duly verifiedvolume of products lifted out of the depots(volume of petroleum products sold) asstipulated in the subsidy guidelines.

Potential risk of subsidy payment onproducts not consumed by end users

due to losses from pipelinevandalism, theft e.t.c.

- A rough estimation of subsidypayment on product losses forthe period under review (20072009) is estimated at N 11.8billion.

Risk of payment of subsidy onlocally refined products which isnot the intent of subsidy mayencourage inefficiencies in therefinery process.

Ensure more clarity with regards interpretationand application of subsidy to achieve the intent

of the law. Enforce compliance with the provision of the

approved guidelines for the administration ofPSF.


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Subsidy claims should be remitted to NNPCfrom PSF by the Federal Ministry of Finance

(FMF) based on claims approved by PPPRA.However, NNPCs practice is to remit to theFederation Account, amount payable fordomestic crude less subsidy claims. It thenrequests the FMF to pay the subsidy amountdue to it (from PSF) into the FederationAccount being the balance of the cost ofdomestic crude.

Actual remittance of proceeds ofdomestic crude sales to the

Federation Account might be lessthan expected.

Regularise and formalise guidelines for theadministration of PSF.

The Federal Government should formallycommunicate approval of remittance of crudesales net of subsidy to NNPC, PPPRA, FMFand CBN.


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There are instances of delays in receipt ofsubsidy advice from PPPRA resulting in the

estimation of subsidy claims by NNPC whichresults in over/ under-deduction from proceedsof domestic crude sales.

- For example, N25bn was deducted assubsidy estimate for September 2009 fromdomestic crude sales proceeds whilePPPRA approved a subsidy of N23.8bn.

- N35bn was also deducted as subsidyestimate for November 2009 but PPPRAapproved a subsidy of N21.3bn.

- Over-deduction for these two monthsamounted to N14.9bn. However, onlyN4.2bn was swept into the FederationAccount by NNPC as adjustment forsubsidy claimable in the two months.

Under-remittance of domestic crudesales proceeds into the Federation

Account.- Based on our analysis, subsidy

over-deduction for 2007, 2008and 2009 was estimated atN2.0bn, N10.3bn and 16.2 bnrespectively.

High risk of loss of subsidyadjustments trail specifically ininstances of under-remittance.

Define and re-enforce deadlines for submissionof subsidy advice by PPPRA.

Deduction from the proceeds of domestic crudesales by NNPC should be solely based onamount advised by PPPRA.

Transport Products from Refinery/ Atlas Cove to Depots


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Sub optimal utilisation of depot storagefacilities.

- DPK tanks (storage capacity of 18,000cubic meters) at the various PPMC Depotswithin System 2B (Mosimi Area) have notbeen utilised for the past three years asDPK has not been supplied through thissystem. However, the tanks are said to bein good condition.

Risk of ineffective distribution ofproducts.

Possibility of incurring additionalcost from leasing of third partystorage facilities.

Review existing facilities and exploreopportunities to ensure full optimisation ofstorage facilities.

Implement procedures for ensuring the periodicreview of facilities with a view to ensureoptimal utilisation

Product losses due to incessant pipelinevandalism continue to hinder the transportationof petroleum products.

- Petroleum products losses through pipelinevandalism stood at 110.38 metric tones in2009 and the monetary value was estimatedat N8.1 bn.

Delays in product distribution dueto pipeline shutdown/ downtimewhich could impact productavailability.

Additional cost will be incurred onpipeline repair.

Increased cost of transportation ofproducts using trucks.

Ensure continuous monitoring/ surveillance ofpipelines to reduce the frequency of occurrenceof pipeline vandalism.

Deploy technology to ensure proactivedetection of pipeline leakages.


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Lack of an integrated inventory managementsystem to capture and monitor inventory across

all depot locations.- Data on product transfer, reception and

discharge across the various depot/ jettiesare captured on MS Excel.

Increased possibility of manualerrors.

Late or non detection of inventorylosses/ reconciliation issues.

Inaccurate inventory recordsresulting in misstatement offinancial records.

Ensure timely reconciliation of product receiptto discharge and physical balance. This should

also include reconciliation to original letter ofaward/ contract.

Deploy an integrated inventory managementsystem to minimise errors and enable easyreconciliation of inventory data.

- Currently, NNPC is in the process ofimplementing an ERP solution (SAP)which is expected to address the challengesbeing faced with non-integrated/ stand-alone systems.

- There is a need to ensure that functionalrequirements meet and address the issuescurrently faced before the implementationcan be successful.


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We observed discrepancies in the volume ofpetroleum product import receipt at Atlas Cove

Jetty in June 2010. While MTD reported avolume of 193,160 MT, Mosimi Area Officequoted a volume of 184,989 MT for the sametransaction.

- Further evaluation of reports presented byMTD and Mosimi Area Office revealedthat MTDs figures were misstated.

Incomplete and inaccuraterecording/ reporting of product

receipts.

Ensure inventory receipts are reviewed byappropriate level of staff before reports are

forwarded to Management. Deploy an integrated inventory management

system to minimise errors and enable easyreconciliation of inventory data.


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Market and Sell Products


Basis for allocation of products to coastalMarketers is not clearly defined and appears to

be at Managements discretion.

Lack of objectivity andtransparency in the allocation

process. The risk exists that product

allocation to coastal marketerscould be prone to abuse.

Review coastal sales process and ensureallocation criteria are clearly defined.

Sub-optimal utilisation of Managements time:- Allocation of products to various coastal

marketers is currently being handled by theMD, PPMC.

Ineffective utilisation ofManagements time.

Review process and implement relevantcontrols to mitigate inherent risks arising fromexecution of tasks by other personnel.

Redefine responsibilities to free upManagements time for more strategicactivities.

Define and document basis for allocation ofproducts to coastal Marketers.


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Market and Sell Products


Ineffective implementation of creditmanagement procedures resulting in

outstanding receivables from credit marketers.- Based on our review of consolidated

debtors age analysis report for Marketers,

overdue debts as at 22nd August 2010 areestimated at N1.36 bn and N5.5bn forIndependents and Major Marketersrespectively.

Increased likelihood of dispute overreceivables.

Increased risk of bad debt resultingin lost revenue.

Delays in collection negativelyimpacts cash flow and ability tomeet financial obligations.

Review and update guidelines with regardscredit management:

- Evaluation of credit marketers.- Establishment and periodic review of credit

limits.

- Monitoring of credit limit. Implement aggressive debt collection methods

to collect outstanding debts.

We observed that there are no definedguidelines for provisioning of bad debts fromproducts sales which is not in line with leadingand generally acceptable accounting principles.

Misstatement of informationprovided in the financial reports.

Update accounting policies to includeprovisioning and write-off of doubtful debts.Policies should clearly state provision rate,duration, write-off, e.t.c.

Delays in capturing sales transactions on theSun Accounting System:

- As at August 2010, we observed thattransaction entries relating to payment andproduct lifting by Coastal Marketers forJune and July 2010 have not been capturedonto the system.

Inaccurate financial records. Long cycle time for preparation of

management reports due toreconciliation.

Increased and cumbersomereconciliation.

Redesign process to ensure real time capture oftransactions on the accounting system.

Define and implement timelines for posting oftransactions as KPIs for process operators.

Explore opportunities to generate systeminvoices/ receipt.


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Process Customer Invoice


Poor data management:- We observed that documents are not

adequately filed and some documents arestacked in bags.

Difficulty in retrieving supports forpast transactions.

Increased risk of misplacement ofdocuments.

Lack of supporting documents topresent in cases where transactionslisted on invoices are disputed byMarketers.

Implement procedures for ensuring effectiveand timely filing/storage and back up of

documents Explore implementing a document

management system to reduce the use of paperin the process flow.

Timelines for filing of al l documents should beclearly defined and monitored to ensurecompliance.

Ensure periodic system back-up to minimizedata losses.

Sub optimal utilisation of technology:- Prominent usage of excel sheet for various

transactions.

- Lack of integrated systems to enable end toend monitoring, reconciliation and tracking

of transactions.

Increased risk of errors from datatranscription/ transposition.

Long cycle time for execution oftransactions

Ensure speedy implementation of ERP solution(SAP) across the Corporate Headquarters aswell as the subsidiaries.


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