RELEASE OF NEITI FINAL AUDIT REPORT

UNCLAS SECTION 01 OF 03 ABUJA 001092

SIPDIS

SIPDIS

STATE PASS TO USTR
TREASURY FOR LKOHLER
USDOC FOR 3317/ITA/OA/KBURRESS
USDOC FOR 3130/USFC/OIO/ANESA/DHARRIS

E.O. 12958: N/A
TAGS: EFIN ECON NI OIL
SUBJECT: RELEASE OF NEITI FINAL AUDIT REPORT


1. SUMMARY. On April 11-12, the Nigerian Extractive
Industries Transparency Initiative (NEITI) released it's
final audit report on the Nigerian oil and gas industry. It
found that the record keeping has a lot to be desired, with
a wide disparity (over (US$224 million in 2002) between what
companies paid and what the Central Bank recorded.
President Obasanjo expressed displeasure that the audit
showed huge losses in oil and foreign exchange, and asked
the Hart Group, which conducted the audit, to attempt to
reconcile the discrepancies and report back in three months.
Some see this as an attempt to avoid the questions raised by
the report. The NEITI stills needs supporting legislation to
be institutionalized, but in the meantime the audit stands
as the first comprehensive attempt to bring some
transparency to Nigeria's oil revenues. End Summary.


2. The NEITI is the Nigerian component of the international
EITI, a UK-led initiative for transparency and
accountability in the extractive industries. Under NEITI
the GON has held meetings throughout the country and adopted
a Memorandum of Understanding prepared by the NEITI's NSWG
which is made of government, business and civic and
educational institutions to review these documents. The
NEITI, under the leadership of the Minister for Solid
Minerals, Obiageli Ezekwesili, has begun to have its first
impact. After doing a number of road shows across the
country, on April 11-12th in Abuja, NEITI presented the
final Financial, Physical and Process Audit Reports of the
Nigerian Oil and Gas Industry from 1999 to 2004. The most
important was the Financial Audit in two volumes. Volume 1,
The Report on Financial Flows, is a summary of financial
flows from 1999-2004, Volume 2, Issues in Government
Financial Systems, presents the findings on transparency and
accountability. The data was collected using templates
submitted by each entity using cash basis accounting, which
is the prevalent GON practice.

Highlights of the Financial Audit
--------------


3. The Financial Audit details the cash flows between the
oil and gas industry and the GON, principally from sales of
crude oil, petroleum profits tax (PPT),royalties, gas flare
penalties, non-oil flows (taxes) and payments to the Niger
Delta Development Commission (NDDC). Total flows to the
Government of Nigeria based upon all paying and receiving
entities of the oil and gas sector (oil companies, CBN, and
the GON) from 1999 to 2004 were:

1999 US $ 7.8 billion,
2000 US $15.6 billion,
2001 US $16.9 billion,
2002 US $11.4 billion,
2003 US $16.2 billion,
2004 US $26.3 billion.

The flows steadily increased until 2002 when they took a
substantial drop from US $16.9 billion in 2001 to US $11.4
billion in 2002. They returned to the 2001 levels in 2003
to US $16.1 billion. During the same years the GON invested
in joint ventures:

1999 US $2.3 billion
2000 US $2.4 billion
2001 US $2.45 billion
2002 US $4.13 billion
2003 US $3.53 billion
2004 US $2.9 billion

This accounted for the following net inflows:
1999 US $5.5 billion
2001 US $13.2 billion
2002 US $9.0 billion
2003 US $12.7 billion
2004 US $23.4 billion

Contentious Areas
--------------


4. One of the more contentious areas of the financial audit
is the financial flows to the GON vis-a-vis the CBN. Oil
companies make most payments to the GON through the CBN,
including petroleum profits taxes, royalties, gas flaring
penalties, reserves additional bonus repayments, and
signature bonuses on license award. The report shows for
every year except 2000 and 2004, the amount paid by the oil
companies exceeded what was recorded by the CBN. Based on
the aggregated flows, the balances either under or over
recorded by the CBN with respect to what was reported by the
oil companies were:

1999 US $50 million was under recorded by CBN
2000 US $144 million was over recorded by CBN
2001 US $95 million was under recorded by CBN
2002 US $224 million; was under recorded by CBN
2003 US $362 million; was under recorded by CBN
2004 US $263 million was over recorded by CBN


5. Another area of concern is the differences between the
Accountant General of the Federation (AGF) and the CBN. The
AGF is responsible for the management of the Federation
Account, which comprises the financial flows of the oil and
gas sector. The CBN receives these flows and is the banker
for the AGF. Of the areas reported (PPT, royalties, gas
flaring, equity and domestic crude) there were major
differences in the equity and domestic crude oil accounts.
Over the six year period the CBN reported US$803 million
more in the equity crude account and Nigerian Naira 153.4
billion (US$ 1.2 billion in today's dollars) more in the
domestic crude account than what was reported by the AGF.
(Note: The AGF submission arrived late in the audit and was
not used in any of the finding in the report).

Auditor Recommendations
--------------


6. The Hart Group, which conducted the audit, recommended
that the AGF be more actively involved in monitoring
petroleum sector financial flows. The CBN should notify the
AGF of the expected inflows and actual receipts. The AGF
should interface with the CBN on all transactions. The CBN
should make the details of all transactions widely available
on a regular, perhaps daily basis. The CBN is installing a
new electronic information platform that should allow these
issues to be addressed.

Physical Audit
--------------


7. The Physical Audit report maps and reconciles the
hydrocarbon flows, including production, imports and inland
consumption of crude oil, petroleum products, natural gas
and liquefied gas. This audit tried to account for
everything produced from all the oilfields, onshore and
offshore and the gross and net oil balances. Most companies
submitted gross and net balance reports, which supposedly
take into account losses normally attributed to oil
production. A long-standing problem in Nigeria is oil
diversion, sometimes siphoned directly from pipelines, and
sometimes diverted farther up the production and transport
chain. The practices are commonly known as "bunkering".
Estimating the amount diverted is a major challenge. Past
reconciliations have not been successful in accounting for
the losses. This physical audit again was unable to
calculate the amount of diverted oil, which some believe to
be over 10 million barrels during the audit period.


8. The auditors advocate a dialogue with the major
government, commercial entities, and the National
Stakeholders Working Group (NSWG),a component of the NEITI,
on how to proceed. The entire hydrocarbon system needs to
be monitored. The report recommends that the Department of
Petroleum Resources, which is responsible for ensuring
royalties taxes are paid based upon the amount of oil pumped
by the oil companies through the system, begin active
monitoring. Currently, they have no record of what has
actually gone through the system, but rely on oil company
reports.

Audit Report Setback
--------------


9. On May 1, President Olusegun Obasanjo rejected the report
at a meeting with the Federal Executive Council. The
Auditors presented the reports for Council to accept on
behalf of the GON. President Obasanjo stopped the
presentation and demanded that the widely reported shortfall
of US $250 million in 2002 between what was paid by the
companies and what was recorded by the CBN be properly
accounted for in the report. The Hart Group, who prepared
the report, was tasked by the president to trace where the
money went. President Obasanjo is the Minister of Petroleum
and literally in charge of the GON petroleum resources, and
has been for the years 1999-2004 covered by this report. If
the oil and gas sector comes under closer scrutiny because
of this report, the President faces questions.

The future of NEITI
--------------


10. Comment: Currently the NEITI process is optional. Most
of the funding has come from the UK. There is NEITI Bill
before the legislature, which would make the audit mandatory
and include an appropriation in the national budget.
Together with the Fiscal Responsibility Bill, it is key to
bringing more transparency to how Nigeria uses it oil
revenues to support national development. The government
hopes to pass them this year, but they could fall victim to
election cycle distractions. A new government would probably
still feel obligated to continue the process now begun. In
the meantime, the report provides ammunition to those
claiming that oil funds are misused. It also draws a picture
of the many weaknesses in the current accounting, which
should provide impetus for at least incremental
improvements. End Comment.
CAMPBELL